3 dividend stocks with high free cash flow

In addition to earnings, one of the things that determines a company’s ability to keep paying a dividend is its level of free cash flow – the cash that a company has left over after paying its required operating expenses. With that in mind, a recent article in SmartMoney looked at “3 Stocks With Heaps of Free Cash Flow.”

Here’s my quick take on the three 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):

Lockheed Martin [[LMT]] (***) – Currently trading at about $75 and yielding 3%, the shares of this defense contractor have been underperforming the market and other defense stocks recently, apparently on fears of reduced spending on big aircraft programs:

The stock is down almost 15% from the highs it made earlier this year, and down 38% from its all-time high of about $120 made late last year. Valuation analysis suggests the stock is undervalued here and worthy of a closer look.

Eaton Corp. [[ETN]] (***) – The shares of this maker of industrial electrical components have almost doubled from their lows of earlier this year and, currently at $58, are yielding about 3.5%:

Unlike with LMT above, however, valuation analysis suggests the shares are perhaps about fairly valued to even overvalued at these levels. I wouldn’t be interested here, but would reconsider ETN on a drop back into the $40s or lower. (Note: I’m currently short some 35-strike LEAPS puts in ETN, which means I could ultimately end up being put the shares at $35 if the stock were to revisit its lows before the options expire in January 2011.)

Pfizer [[PFE]] (0 stars) – Earlier this year, this large pharmaceuticals firm halved its dividend to help finance its acquisition of Wyeth, and as a result was punished by investors:

Currently trading at about $16 and yielding almost 4%, the stock still appears somewhat undervalued. I would continue to be interested in it at lower levels (below $14-$15), where the dividend yield is a bit higher. (Note: I’m currently short some LEAPS puts in PFE at the $15 and $12.5 strike levels. Also, see my full take on Pfizer.)

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