Still Recommending Dividend Stocks

With so much uncertainty in the markets, it’s nice to see financial pundits like Jim Cramer still recommending dividend stocks. Although dividend stocks are not as sexy as some of the other investment vehicles being touted today, they can produce a steady income stream for investors. Of course investors must be prudent, since even stocks with identical yields can offer vastly different risk profiles.

Jim Cramer recently commented that a high dividend yield could signify “the best of dividends” or “the worst of dividends”. The key to evaluating dividend stocks is determining how safe the dividend really is.

Consider Annaly Capital Management (NLY: 16.48 -0.42%) and Hatteras Financial (HTS: 27.73 -0.29%). Both are real estate investment trusts (REIT) that buy high-yielding mortgage-backed bonds. Both offer extremely high dividend yields that are above 15%. However, Annaly just increased their quarterly dividend by nearly 5%. Meanwhile, Hatteras reduced their dividend by 8% given their outlook for 2010. Advantage NLY.

Now compare the two on valuation basis. Annaly currently trades at 5.2x P/E. Hatteras trades at 6.0x, making its stock relatively more expensive. Advantage NLY.

Annaly appears to be the clear winner in this head-to-head matchup.

Cramer also added that Annaly has been the only REIT to deliver a positive return on equity every single year for the last decade. It has a portfolio of secure loans. And the company is led by a great CEO, Mike Farrell. Hatteras, on the other hand, has lower quality loans, and less flexibility in the rates it can charge.

Cramer also discussed other dividend stocks on Friday’s Mad Money show. He is bullish on Telkom Indonesia (TLK: 30.30 -2.16%). The stock offers a 5.5% yield and pays out 50-55% of revenues to its shareholders. The telecom has a 52% market share in Indonesia and cell phone usage is expected to grow phenomenally in the short term.

National Grid (NGG: 50.79 -0.55%) is another high yielding foreign stock. The British utility offers a 9.3% yield and is committed to raising their dividend.

One high yielding dividend stock that Cramer recommended that investors avoid is Cheniere Energy Partners (CQP: 21.35 +1.62%). Cramer is a big proponent of natural gas, but CQP seems to have flawed business model. The company imports natural gas, but natural gas is so plentiful in the U.S. it seems odd to pay a premium to import it. So despite the stock’s 10.2% dividend yield, Cramer would recommend investors pass on this natural gas play.

While not all dividend stocks are created equal, it’s certainly nice to see financial pundits still recommending dividend stocks.

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