# The top U.S. dividend stocks: Which are the best values now?

A recent post at the dividend investing blog Dividends Value lists the author’s choices for the 10 Best U.S. Dividend Stocks. Not surprisingly these include such stellar dividend payers as Johnson & Johnson, Procter & Gamble, 3M and Abbott Laboratories to name a few, as well as four honorable mentions.

The post goes on to make an important point: most of these otherwise excellent dividend stocks “are not good buys today.” This shouldn’t come as a surprise given how far (and how quickly) the market has recovered from its lows earlier this year – in general, it’s a lot tougher to find stocks selling below their “fair values” today than it was just a few months ago. Dividend yields too are a lot lower than they were.

Still, there are bound to be some relative bargains still to be had, especially if the market accommodates with a pullback in the weeks/months ahead. So I ran some analysis on all 14 of the dividend stocks mentioned to try to come up with a rough idea of their current “fair” values (see spreadsheet below) and to find out which, if any, might still be reasonably priced:*

The “fair” values listed in the spreadsheet were obtained using several valuation methods:

**Simple DCF Fair Value:** This value is arrived at using a basic discounted cash flow calculator.

**iStockResearch Fair Value:** This value is based on the proprietary stock valuation model available at iStockResearch, which is also based on DCF but with additional inputs.

**Graham Forward Intrinsic Value:** This is based on the forward intrinsic value formula from The Graham Investor.

**PEG Value:** This value is based on the PEG Ratio (price/earnings to growth ratio), where the PEG Value is the price where the PEG Ratio equals one (considered a “fair” value level), using future earnings estimates.

**Very-Long-Term Linear Regression Trendline Value:** This is the current value of the very-long-term (25 years or more) linear regression trendline of the stock price history, which could be seen as representing the long-term “mean” value of the stock price action.

**Average Fair Value:** This is simply the mathematical average of the above five “fair value” results for each stock.

**Ockham Research Valuation:** This isn’t a numeric value, but a positive/negative/neutral valuation based on three criteria – price/sales, price/cash earnings and dividend yield – relative to recent historical values for the stock.

**Bottom line**

The spreadsheet column under the heading “**% Above/Below Average FV**” basically sums it all up by comparing the current stock price of each of the 14 listed dividend stocks with its averaged “fair value.” If a stock is trading above its fair value, the percentage by which it’s doing so is shown in red; if it’s trading below fair value, the percentage amount is shown in green.

At the time of this posting (10/11/09), only three of the stocks are currently showing as undervalued – Automatic Data Processing, Sysco Corp. and Wal-Mart Stores – but not by much. None are trading more than 5% below their average fair value.

On the other hand, five of the stocks are trading well above (10%+) their fair values, including McDonalds, Nucor, 3M and Coca-Cola. The most “expensive” stocks on the list, according to the valuations, are Nucor and (surprisingly) Coca-Cola, each of which is shown as currently being about 35% above fair value (although the latter at least has a positive Ockham Research valuation).

I’m currently short some cash-secured put options on several of these dividend stocks, including Abbott Laboratories, Emerson Electric and Procter & Gamble, meaning I’m willing to have shares of these stocks be “put” to me at somewhat lower prices. I’ve been looking to establish similar positions in several other stocks on this list and will likely do so on any decent market pullback.

* Note: I’ve updated the spreadsheet to reflect changes/updates in reported earnings and analysts’ estimates since the original post.

**Related posts:**

Ten high-quality dividend stocks for the next 5 years

The U.S. companies with the safest dividends

10 stocks whose dividends have gone up 50+ years in a row

Safe dividends are out there, just harder to find