NEW YORK (TheStreet) -- When it comes to the Dow Jones Industrial Average, time and technology stocks make fools of us all. So, dear reader, if you're approaching this article with a healthy dose of skepticism: good.Nobody can tell the future, certainly not this author -- rather, the following stock picks are modeled using a combination of arithmetic and historical precedent. If you're interested in seeing how my past Dow picks have fared, skip to the last page of this article. I hold my feet to the fire. In attempting to identify the best Dow dividend stocks for 2012, here are the criteria I've used to arrive at a list of 10: 1.) Each stock must have a liability-adjusted cash flow yield* 1.5 times greater than the yield of a 10-year U.S. Treasury note. 2.) Each stock must have a return on invested capital greater than 10% (using five-year historical cash flows). 3.) Each stock must show a positive total return (including dividends) over the past 10 years. 4.) The dividend yield of the stock must be less than the liability-adjusted cash flow yield. In other words, cash flow must support the dividend. Remember, this list is constructed using only quantitative criteria (in other words, strictly by the numbers). That said, a little color has been added to each of the companies mentioned, which are ordered from most expensive to least. As always, model portfolios should not be treated as gospel; rather, use them as a starting point for your own research. Similarly, all investors should apply their own valuation and qualitative criteria to determine what constitutes a "good buy." *5-Year Average Free Cash Flow / ((Outstanding Shares x Per Share Price) + (Liabilities - Cash)) -- Free cash flow data is sourced from each respective company's annual filing. Outstanding shares and asset/liability data is sourced from each respective company's most recent quarterly filing.
Note: Total return data includes reinvested dividends and is measured from the date of original publication to the closing price on Nov. 22, 2011.
------------------------------10 Most Attractively Valued Dow Stocks - Aug. 6, 2010 Tickers: MSFT INTC JNJ GE PFE XOM CSCO IBM HPQ MMM Portfolio Performance (dividends reinvested): 4.86% The Other 20 Stocks (dividends reinvested): 7.9% Dow Jones Industrial Average ETF (dividends reinvested): 11.32% Analysis: Horrible. That's the best way to describe the performance of this portfolio. But in fairness to the author, this was never presented as a list of stocks to buy. Rather, this article largely explored why these stocks were "attractively valued."
------------------------------7 Dow Dividend Stocks Safer Than T-Notes - June 30, 2010 Tickers: PG KO INTC XOM JNJ HD PFE Portfolio Performance (dividends reinvested): 28.2% iShares 7-10 Year Treasury Bond Fund (dividends reinvested): 14.48% Analysis: Excellent. These seven stocks outyielded U.S. Treasury notes (using an iShares ETF as a benchmark proxy) From a total return perspective, the portfolio nearly doubled the performance of the benchmark. Not too shabby considering the amount of stock market volatility during the period. 10 Dow Stocks Investors Should Avoid - June 25, 2010 Tickers: T VZ CVX WMT KFT AA BAC JPM MCD CAT Portfolio Performance (dividends reinvested): 13.5% The Other 20 Stocks (dividends reinvested): 11.9% 30 Stocks, Equally-Weighted (dividends reinvested): 12.44% Dow Jones Industrial Average ETF (dividends reinvested): 16.87% Analysis: Poor. Had you avoided these 10 stocks, you would have been spared a nightmare stock -- Bank of America -- but denied one of the Dow's best performers: Caterpillar. This portfolio used extremely conservative valuation criteria (10-year average cash flow) that ignored Caterpillar's impressive, recent growth. Lesson learned.
------------------------------Each of these lists were constructed using only quantitative criteria (in other words, strictly by the numbers). In the original articles, you will find commentary/analysis that supported or refuted my prima facie valuation. As a final reminder, this year's picks are screened using quantitative criteria. >>To see these stocks in action, visit the 10 Best Dow Dividend Stocks for 2012 portfolio on Stockpickr. -- Written by John DeFeo in New York City Follow @johndefeo
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