Forbes: 6 dividend stocks that pay

In its April issue, Forbes highlights some dividend stock picks of Paul Davis, co-manager of the Schwab Dividend Equity fund. Surprisingly (or maybe not) he’s willing to buy into – or hold onto – stocks of companies that have cut their dividends.

His thinking? In these especially tough times a dividend cut today may mean a stronger and healthier dividend payer in the future.

As a result, he’s not ignoring the financial services sector, which represents 16% of his fund’s holdings. Consumer goods and health care are almost as well represented, at 14% each.

The article includes a list of six solid dividend-paying companies. Here’s my quick take on the six dividend stocks mentioned (the stars represent Dividendinvestor.com’s star ranking system – three stars are five years of consecutive dividend increases, four stars are ten, and five stars are 20):

Bank of New York Mellon (BK: 25.799 +0.70%, yld: 1.41%) (0 stars) – Trading at $28 and yielding 3.5%, the shares of this financial services company appear fairly valued by some measures, but apparently overvalued based on comparison with recent historical valuation ratios. The company doesn’t have a particularly distinguished history of raising its dividend, and, being a TARP recipient, may be looking at a dividend cut. I’m giving this a pass.

Baxter International (BAX: 42.8299 -0.33%, yld: 2.70%) (0 stars) – Trading at $50 and yielding 2.1%, the shares of this medical products maker appear roughly fairly valued to overvalued by most measures. The company has paid a dividend continuously – although somewhat erratically – for many years. The stock price is currently well above its long-term linear regression trendline (currently at about $39), suggesting a higher degree of downside risk. I’m staying away.

Chubb (CB: 56.13 +0.65%, yld: 2.58%) (*****) – This property/casualty insurer recently raised its quarterly dividend by 6.1% to 35 cents from $0.33 per share – not surprising considering its status as a Dividend Aristocrat – and currently yields about 3.3% at its current price of $42. Trading a bit above its long-term linear regression trendline (currently at about $38), the stock appears to be about fairly valued here. CB is on my watchlist and a dividend stock I’ll certainly be interested in on any move to the low $30s or below.

Heinz (HNZ: 46.83 +0.88%, yld: 3.68%) (0 stars) – This maker of food products would seem like a safe bet. However, it doesn’t have a consistent history of raising its dividend (and in fact cut its dividend in 2003 according to Yahoo Finance). Valuation analysis suggests it’s fairly valued to overvalued here (at ~$35 and yielding 4.8%). I’m staying away.

JPMorgan Chase (JPM: 40.15 +2.63%, yld: 0.51%) (0 stars) – Trading at about $29 and yielding 0.70%, the shares of this financial holding company certainly don’t seem to have a lot to recommend them after the company recently slashed its quarterly dividend by 87% – from $0.38 to $0.05. Valuation analysis doesn’t appear to offer much positive news either, with the shares appearing anywhere from fairly valued to overvalued here. Prior to its dividend cut JPM was no Dividend Aristocrat either, so there’s not a lot of reason to expect it will act like one in the future, but who knows. In any case, there’s nothing here that interests me right now.

Microsoft (MSFT: 24.0901 +0.67%, yld: 2.17%) (0 stars) – At about $18 and yielding 2.9%, shares of this software technology company appear undervalued, with a calculated fair value somewhere in the low $20s. The company has been raising its dividend for the last several years, but as yet hasn’t emphatically committed to growing it regularly. There appears to be some long-term price support at the $13-$15 level. (Note: I have a position in MSFT options. For more, see my full take on Microsoft.)