10 Best Dow Dividend Stocks for 2011

BOSTON (TheStreet) -- Pimco, the bond-fund manager that predicted the next five years would be a "new normal" of slow economic growth and below-average investment returns, boosted its 2011 economic-growth forecast last week by a full percentage point.

Pimco's new normal, coined after the financial meltdown and stock-market crash, has cast a pall over the investing world because the firm runs the world's biggest bond fund and employs some of the brighest minds in the market. With U.S. stocks struggling this year, it seemed Pimco's prediction was prescient.

But some investors disagreed. Ken Fisher, billionaire CEO of Fisher Investments, said as stocks were rebounding in September that the next decade would be as fruitful as the 1990s, when the S&P 500 Index rose in eight of 10 years. He called the concept of the new normal "idiotic." Just on Friday, "Mad Money" host Jim Cramer said a "raging" bull market is beginning.

So, the case for stocks is compelling, given the low yields offered by bonds and the government's commitment to accelerate economic growth. Among the cheapest stocks in the U.S. market are Dow components, which offer clean balance sheets, powerful brands and emerging-markets exposure.

Below are analysts' aggregate ratings, calculated by Bloomberg, of the bottom 20 Dow dividend stocks.

30. Travelers ( TRV), Aggregate Rating: 3.58/5
29. Verizon ( VZ), Aggregate Rating: 3.73/5
28. Exxon Mobil ( XOM), Aggregate Rating: 3.74/5
27. Caterpillar ( CAT), Aggregate Rating: 3.79/5
26. Alcoa ( AA), Aggregate Rating: 3.82/5
25. Disney ( DIS), Aggregate Rating: 4.06/5
24. Home Depot ( HD), Aggregate Rating: 4.07/5
23. J&J ( JNJ), Aggregate Rating: 4.08/5
22. GE ( GE), Aggregate Rating: 4.10/5
21. 3M ( MMM), Aggregate Rating: 4.11/5
20. Intel ( INTC), Aggregate Rating: 4.11/5
19. AT&T ( T), Aggregate Rating: 4.11/5
18. Pfizer ( PFE), Aggregate Rating: 4.21/5
17. B. of A. ( BAC), Aggregate Rating: 4.24/5
16. Boeing ( BA), Aggregate Rating: 4.27/5
15. Am. Express ( AXP), Aggregate Rating: 4.27/5
14. McDonald's ( MCD), Aggregate Rating: 4.27/5
13. DuPont ( DD), Aggregate Rating: 4.28/5
12. Cisco ( CSCO), Aggregate Rating: 4.31/5
11. P&G ( PG), Aggregate Rating: 4.33/5

Now, here is a closer look at the 10 highest-rated Dow dividend stocks for 2011.

10. IBM ( IBM) makes technology products and offers consulting services worldwide.

12-Month Sales Growth: 2.7%
12-Month Net Income Growth: 10%
Quarterly Operating Profit Margin: 19%
Cash Flow Multiple: 9.5 (41% peer discount)
Analysts' Median Target: $152.50
3-Year Dividend Growth: 19%
Dividend Yield: 1.8%
Payout Ratio: 23%

2011 Catalyst: Despite mediocre growth, with third-quarter sales up 3% and net income up 12%, IBM's stock has risen 10% in 2010. Its float has decreased 5.5% since the year-ago quarter. Quarterly earnings per share jumped 18%, boosted by the lower share count. Furthermore, return on equity was exceptionally high, at 65%, exceeding the industry average of 51% and the S&P 500 average of 13%. Such outstanding metrics have helped the stock deliver annualized gains of 9.9% since 2007, outperforming indices.

A foray into cloud computing will help bolster growth in the coming year. IBM has purchased 14 competitors in 2010. Three more deals are pending. Cloud-computing company Salesforce.com has seen its shares more than triple this year. Cloud is the tech theme of 2011.

Bullish Scenario: Citigroup predicts that IBM's stock will appreciate 10% to $160.

Bearish Scenario: Gleacher & Co. offers a target of $137, implying 5% downside.

9. Wal-Mart ( WMT) is the world's biggest retailer.

12-Month Sales Growth: 4%
12-Month Net Income Growth: 12%
Quarterly Operating Profit Margin: 5.5%
Cash Flow Multiple: 7.7 (13% peer discount)
Analysts' Median Target: $61.05
3-Year Dividend Growth: 14%
Dividend Yield: 2.2%
Payout Ratio: 29%

2011 Catalyst: It may seem paradoxical to call the world's largest company a growth story, but Wal-Mart has the most effective distribution network in history, with the lowest-cost business model in its field, offering the highest-savings proposition to customers.

Its stock has delivered annualized gains of 3.5% since 2007, excluding the effect of dividends. Quarterly return on equity, at 23%, bested the industry average of 19% and the S&P 500 average of 13%.

An expansion into frontier markets is ongoing. A deal for a 51% stake in South African MassMart is pending. Quarterly international sales and international operating income increased 7% and 17%, respectively. Wal-Mart is beginning its next phase of domination.

Bullish Scenario: HSBC values Wal-Mart at $68, suggesting a 25% 12-month gain.

Bearish Scenario: Goldman Sachs expects the stock to rise 7% to $58 in the next year.

8. Kraft Foods ( KFT) makes snacks, cheese, candies and quick-meal products.

12-Month Sales Growth: 20%
12-Month Net Income Growth: 72%
Quarterly Operating Profit Margin: 14%
Cash Flow Multiple: 16 (12% peer premium)
Analysts' Median Target: $34.71
3-Year Dividend Growth: 4.4%
Dividend Yield: 3.8%
Payout Ratio: 73%

2011 Catalyst: Though expensive based on cash flow, Kraft is cheap relative to packaged-food peers based on its forward earnings multiple of 13, book value multiple of 1.6 and sales multiple of 1.2. Quarterly revenue rose 23%, boosted by the Cadbury buy.

Developing-market revenue surged 70%, with double-digit percentage gains in the Latin America and Asia-Pacific regions. According to management, the Cadbury purchase is already creating cost savings and gave the formerly U.S.-focused company a tremendous foothold in emerging markets. It's using "power brands" to garner loyalty as middle classes form in Brazil, India, China and elsewhere and ramp up consumption.

Bullish Scenario: JPMorgan forecasts that Kraft's stock will rise 30% to $40.

Bearish Scenario: Deutsche Bank predicts that the shares will decline to $30.

7. Hewlett-Packard ( HPQ) makes computers and servers and offers consulting services.

12-Month Sales Growth: 10%
12-Month Net Income Growth: 14%
Quarterly Operating Profit Margin: 11%
Cash Flow Multiple: 8.2 (39% peer discount)
Analysts' Median Target: $55.40
3-Year Dividend Growth: -7.2%
Dividend Yield: 0.8%
Payout Ratio: 9%

2011 Catalyst: HP's stock price has suffered since CEO Mark Hurd departed in August. But it is one of the cheapest technology large-caps. Its sells for a forward earnings multiple of 7.4, a book value multiple of 2.4 and a sales multiple of 0.8, discounts of up to 76% to computer and peripheral industry averages.

Value is no guarantee of performance. HP's stock has suffered annualized loss of 6.4% since 2007. A movement into cloud-computing should help in 2011. HP has completed eight acquisitions in 2010. One deal is pending. A pick-up in consumer sentiment, evident in the 74.2 read of last week's U. Michigan sentiment survey, should abet a laggard consumer segment.

Bullish Scenario: Citigroup values Hewlett-Packard at $70, implying 65% of upside.

Bearish Scenario: Deutsche Bank, ranking the stock "hold", expects it to climb to $45.

6. Merck ( MRK) is a global pharmaceutical company.

12-Month Sales Growth: 88%
12-Month Net Income Growth: -2%
Quarterly Operating Profit Margin: 30%
Cash Flow Multiple: 12 (7% peer premium)
Analysts' Median Target: $41.65
3-Year Dividend Growth: 0%
Dividend Yield: 4.2%
Payout Ratio: 54%

2011 Catalyst: Merck is a solid dividend stock. Its 4.2% yield is third-highest in the blue-chip Dow. However, it hasn't increased the distribution since 2004. As with Pfizer, patent expiry is a concern.

However, analysts see value in Merck shares. A forward earnings multiple of 9.4, a book value multiple of 2 and a sales multiple of 2.5 represent 20%, 61% and 22% industry discounts. The 2009 purchase of Schering-Plough has bolstered earnings, but one-time charges have plagued recent results, most recently, a $950 million reserve related to a recall.

Emerging markets are a growth venue. That geographic segment added 18% of quarterly sales.

Bullish Scenario: Deutsche Bank forecasts that Merck's stock will advance 34% to $48.

Bearish Scenario: Jefferies values the shares at $37.80, implying 5% of upside.

5. United Technologies ( UTX) is an aerospace, defense and industrial company.

12-Month Sales Growth: 0.8%
12-Month Net Income Growth: 8.9%
Quarterly Operating Profit Margin: 16%
Cash Flow Multiple: 13 (11% peer premium)
Analysts' Median Target: $85.86
3-Year Dividend Growth: 13%
Dividend Yield: 2.2%
Payout Ratio: 38%

2011 Catalyst: United Technologies' shares jumped Thursday as management boosted its 2011 earnings guidance. It now expects 7% to 14% net profit growth and 3% to 5% organic revenue growth.

Industrial companies are the best-performing investments at this stage in the growth cycle. Also, bullish analysts are telling investors that management's assumptions are typically too conservative at the Hartford, Conn.-based company. United's forward earnings multiple of 15 and book value multiple of 3.4 reflect 16% and 18% discounts to peer averages.

The company has completed five acquisitions in 2010. One is still pending. It has $5.7 billion of cash on hand.

Bullish Scenario: Jefferies believes that United Technologies will climb 15% to $90.

Bearish Scenario: Goldman Sachs expects the stock to appreciate 6% to $83.

4. Microsoft ( MSFT) sells software, including the Windows operating system and Office product suite.

12-Month Sales Growth: 17%
12-Month Net Income Growth: 50%
Quarterly Operating Profit Margin: 44%
Cash Flow Multiple: 8.9 (53% peer discount)
Analysts' Median Target: $32.99
3-Year Dividend Growth: 10%
Dividend Yield: 2.3%
Payout Ratio: 24%

2011 Catalyst: Microsoft is one of the most compelling value stocks in the market. It has the strongest brand name in software, lofty margins, with a gross spread of 85%, and an obscene coffer for acquisitions. The Redmond, Wash.-based company held $44 billion of cash and equivalents at its fiscal first-quarter's end and less than $11 billion of debt, for a net liquidity position of $34 billion, plenty for acquisitions.

Its quarterly return on equity rose to 44%, more than doubling the industry average. Return on assets hit 23%, indicating superlative efficiency. Despite such attractive metrics, Microsoft sells for just 10-times forward earnings, a 59% industry discount.

Bullish Scenario: Stifel Nicolaus projects a $40 share price, implying 46% upside.

Bearish Scenario: FBR Capital Markets expects Microsoft's stock to rise marginally to $28.

3. Chevron ( CVX) is the world's second-largest energy company. Its rival is Exxon ( XOM).

12-Month Sales Growth: 20%
12-Month Net Income Growth: 36%
Quarterly Operating Profit Margin: 12%
Cash Flow Multiple: 5.8 (35% peer discount)
Analysts' Median Target: $95.86
3-Year Dividend Growth: 7.9%
Dividend Yield: 3.3%
Payout Ratio: 34%

2011 Catalyst: Like Microsoft, Chevron offers a compelling risk-reward proposition, given its size, management and competitive position.

Its trailing earnings multiple of 10, forward earnings multiple of 8.9, book value multiple of 1.7, sales multiple of 0.9 and cash flow multiple of 5.8 represent discounts of 46%, 58%, 59%, 70% and 35% to oil and gas industry averages. Its PEG ratio, a measure of value relative to predicted long-run growth, of 0.1 reflects a 90% discount to estimated long-term fair value.

With oil above $90 a barrel and predicted by some to pass $100 in 2011, Chevron's margins will elevate, amplifying its net income and earnings per share.

Bullish Scenario: Barclays values Chevron's stock at $107, suggesting 23% of upside.

Bearish Scenario: Deutsche Bank expects Chevron's shares to drop 8% to $80.

2. JPMorgan ( JPM) is a financial-services company, with commercial- and investment-banking units.

12-Month Sales Growth: -1.7%
12-Month Net Income Growth: 73%
Quarterly Operating Profit Margin: 44%
Cash Flow Multiple: 31 (52% peer premium)
Analysts' Median Target: $52.29
3-Year Dividend Growth: -48%
Dividend Yield: 0.5%
Payout Ratio: 6%

2011 Catalyst: In 2010, JPMorgan suffered along with other financials. The industry group has been the third-worst performing among S&P 500 components, narrowly beating health care and utility stocks.

But an improving credit environment, with fewer foreclosures and debt defaults, will translate to fewer loss reserves and greater profitability in 2010. Divestiture of principal-strategies is a concern.

Still, at 8.7 times forward earnings, a 27% industry discount, JPMorgan is too cheap to pass up. Net charge-offs and delinquencies in its card business are rapidly declining. The bank's dividend is poised to rebound as the economy gains steam.

Bullish Scenario: Barclays predicts that JPMorgan's stock will advance 45% to $60.

Bearish Scenario: FBR Capital Markets expects the shares to gain 9% to $45.

1. Coca-Cola ( KO) sells syrups, concentrates and beverages worldwide.

12-Month Sales Growth: 5%
12-Month Net Income Growth: 21%
Quarterly Operating Profit Margin: 29%
Cash Flow Multiple: 16 (16% peer premium)
Analysts' Median Target: $69.23
3-Year Dividend Growth: 9%
Dividend Yield: 2.7%
Payout Ratio: 53%

2011 Catalyst: Coca-Cola has, arguably, the world's best brand, and it's expanding overseas. Third-quarter volume jumped 6%, with a 2% gain in North America and a 6% advance overseas. Eurasia and Africa volume climbed 12%. Pacific volume, including China, expanded 12%. Chinese volume itself rose 11%.

The beverage business is booming. Coke opened three new bottling plants in China during the quarter. Though not cheap relative to beverage peers, Coke is a fundamentally attractive stock, with a 27% return on equity in the latest quarter and a 14% return on assets. Of analysts covering Coke, 85% recommend buying its shares and 15% advise holding them.

Bullish Scenario: Stifel Financial forecasts that Coke's stock will advance 16% to $75.

Bearish Scenario: HSBC values Coke at $64, suggesting a marginal decline.

-- Written by Jake Lynch in Boston.

To see these stocks in action, visit the 10 Best Dow Dividend Stocks Portfolio on Stockpickr.

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Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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