It's official. 2011 was one of the stock market's rockiest years ever. Out of 252 trading days, the Dow Jones Industrial Average saw triple-digit gains or losses on 103 of them.
And after enough choppiness to make anyone seasick, both the S&P 500 Index and the DJIA ended the year almost exactly where they started.
So much for the 'risk-reward' tradeoff. In 2011, all we got was the risk.
Investors want to flip this relationship around in 2012, wanting more reward with less risk. So we put together a list of our favorite safe, high-yield investments for 2012.
Our list followed a strict set of three criteria:
High-Yield: The investment had to carry a dividend yield of 4.5% or higher.
Safe, Healthy Dividends: Companies with the safest dividends tend to have a good chunk of cash left over after all expenditures and dividends have been paid. Our favorite measure of dividend safety is the free cash flow to equity (FCFE) payout ratio. We searched for companies with FCFE payout ratios under 55% -- the lower the ratio, the larger the cash safety cushion generated by the firm.
Performance: We want long-term winners, so we looked for solid performers able to beat the broader market over the past 52 weeks.
Five standout companies managed to meet our standards:
1. Lockheed Martin (NYSE: LMT)
Dividend Yield: 4.9%
FCFE Payout Ratio: 24%
Total Return (52 Weeks): 7.5%
Performance vs. S&P 500: +2.6%
Why we love it in 2012: Lockheed Martin continues to dominate the aerospace defense industry. It's the world's largest defense contractor and the primary provider of military aircraft to the Department of Defense. And after two wars, the military will need to replace plenty of worn equipment -- regardless of federal budget cuts.
2. Sunoco Logistic Partners LP (NYSE: SXL)
Dividend Yield: 4.6%
FCFE Payout Ratio: 25%
Total Return (52 Weeks): 32.5%
Performance vs. S&P 500: +27.6%
Why we love it in 2012: 2011 was a great year for master limited partnerships (MLPs) like SXL. We think the oil and gas pipeline builder will continue to dominate in 2012 because it pairs the high yield of an MLP with a remarkable track record of stability (evidenced by its low beta of 0.03), making it a great choice for safety-conscious investors.
3. Verizon (NYSE: VZ)
Dividend Yield: 5.3%
FCFE Payout Ratio: 38%
Total Return (52 Weeks): 10.8%
Performance vs. S&P 500: +5.9%
Why we love it in 2012: Verizon has been the epitome of the dependable high-yield stock. Its reputation as the best U.S. wireless carrier, paired with its ability to offer the iPhone, should allow it to steadily grow revenues from smart phones and their highly lucrative service plans.
4. Ameren Corporation (NYSE: AEE)
Dividend Yield: 5.0%
FCFE Payout Ratio: 49%
Total Return (52 Weeks): 15.4%
Performance vs. S&P 500: +10.5%
Why we love it in 2012: Utilities are the classic safe income play, and Ameren is no exception. AEE is one of the prime beneficiaries of new Illinois legislation that revamps ratemaking for the state's utilities, moving Illinois from one of the country's most challenging regulatory environments to one of the best. Long term, the new ratemaking structure should generate significant earnings growth.
5. AT&T (NYSE: T)
Dividend Yield: 5.8%
FCFE Payout Ratio: 53%
Total Return (52 Weeks): 11.1%
Performance vs. S&P 500: +6.2%
Why we love it in 2012: If your goal is a safe and generous dividend, then AT&T is practically a no-brainer. And like Verizon, AT&T continues to benefit from the ongoing smart phone revolution. Income investors should note that last month, AT&T raised its dividend, marking 28 consecutive years of dividend growth.
Sara Glakas does not personally hold positions in any securities mentioned in this article.
InvestingAnswers, Inc. does not hold positions in any securities mentioned in this article.
