Today’s Daily Angle comes from Wikinvest Wire member Benjamin Clark of ModernGraham.com. You can read the full article on the Modern Graham Blog.

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Dividends are one of the key components of any solid investment strategy. Benjamin Graham taught that companies that pay dividends are often worthy of further research. Looking at the Dow Jones Industrial Average components, these 3 companies seem to be the best bet for a second look by dividend investors.

1. PFE – Pfizer Inc – 5.40% dividend yield. Pfizer passes our tests for the defensive and enterprising investors with a strong balance sheet. It’d be nice if the earnings were growing a little bit more, but they have been very stable at least. Our valuation model puts a price of $25 on the company, which puts it at approximately a 28% discount to the value. Click here for analysis on PFE from Modern Graham
2. JNJ – Johnson & Johnson - 3.14% dividend yield. Johnson and Johnson passes the tests for the enterprising investor but fails for the defensive investor due to the price to book ratio being a little on the high side. Theearnings growth has been strong over the last 10 years and we value it at $97. Click here for analysis on JNJ from Modern Graham
3. PG – Proctor & Gamble – 2.92% dividend yield. Proctor & Gamble has had very strong earnings growth, causing it to pass the test for the defensive investor despite some balance sheet issues (poor current ratio and a lot of debt compared to the current assets). We value the company at about $107. Click here for analysis on PG from Modern Graham

As a reminder, all intelligent investors should do their own research prior to making any purchase and should not rely on anything read on the internet. That goes for speculators and unintelligent investors as well!

Full Disclosure: At the time of writing, author is Long PFE.

Today’s Daily Angle comes from Wikinvest Wire member Dividend Growth Investor. You can read the full article on DividendGrowthInvestor.com

Most companies use debt for a variety of reasons in their operations. It could be either short term or long-termobligations. If there’s anything the 2007-2009 financial crisis has taught us, it is that excessively leveraged companies could easily blow up after a chain of negative events. Thus it pays to know what the debt situation for a particular company you are investing in actually is.

Some investors typically focus on debt to total assets to gain a perspective on the amount of the leverage the company has. While this method is widely accepted by some investors, I believe that it has some shortcomings, which might prevent investors from seeing the bigger picture. Most importantly comparing debt to total assets does not tell whether a company could service its debt obligations or not.

When you decide to get a loan from your bank, one of the most important questions they have is what your income has been, rather than provide a list of your assets and debts. Only when you provide a proof that you could service a new line of credit, would your banker provide you with a loan.

One method that I prefer is comparing annual earnings before interest and taxes to the amount of annual interest expense paid. While this ratio would vary for different types of enterprises, it should never the less provide an important glimpse to a company’s ability to service its debts when its trended over several years.

I highlighted the coverage ratios for the 51 components of the Dividend Aristocrats Index. Some of the members of this dividend basket have already cut distributions so I expect them to be booted out by the end of 2009. You can find the list, which includes company name, ticker, industry, as well as the past 3 years worth of coverage ratios for each company, here on the Dividend Growth Investor Blog.

Dividend investors should generally look for a higher coverage ratio of interest payments. A lower coverage indicates that a decline in earnings could generally make it difficult for the company to service its debt, which could not only jeopardize its dividend payments but also could lead to bankruptcy down the road.

Full Disclosure: At the time of writing, the author of this piece had a long position in most of the stocks mentioned in the list.

Today’s Daily Angle comes from Wikinvest Wire member Dividend Growth Investor. You can read the full article onDividendGrowthInvestor.com

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Financial stocks, which used to be great dividend investments, have had their share of troubles over the past two years. The sector has rebounded sharply since hitting its lows in March. Since the major dividend growth stories of the past such as Bank of America (BAC) and US Bancorp (USB) have cut dividends, most dividend growth investors seem to have a very low allocation to the sector. As a result dividend investors could suffer inferior risk adjusted returns in the future since they won’t own any financial stocks.

There are several alternatives for investors who are underweight the financial sector right now. One of them involves purchasing shares in some US insurance companies such as Aflac (AFL) or Chubb (CB), which offer decent yields and have a long history of dependable dividend growth.

Another alternative is buying shares in the five major Canadian banks, which seem to have escaped the financial meltdown. While none of them have increased their dividends in over one year, they have not cut them either. In addition to that, major Canadian banks spot very decent yields as well. It is important to check individual payout ratios in order to gauge the sustainability of the dividend payments. The major Canadian banks include Toronto-Dominion Bank (TD), Bank of Montreal (BMO), Royal Bank of Canada (RY), Canadian Imperial Bank of Commerce (CM) andBank of Nova Scotia (BNS).

Buying Preferred stocks could also be a decent bet on the long recovery of US financial institutions. Preferred shareshave a higher ranking than ordinary shares in the event of a bankruptcy, but a lower priority relative to bonds. Preferred stocks do not have voting rights but have a fixed dividend payment, just like a bond. Preferred stockholders are also first in line to receive dividend payments, which are typically fixed. They don’t typically get to share in the prosperity of the enterprise however as preferred stock dividends do not increase. In tough economic conditions however, preferred stock dividends are much less likely to be cut or suspended; as long as the company continues operating as a going concern, preferred stock dividends continue getting paid. In addition to that, if you buy a cumulative preferred stock, the company is obligated to pay distributions to you even if it skips a few payments. That is of course as long as the company is not bankrupt. Two ETFs, iShares S&P US Preferred Stock Index Fund (PFF) and PowerShares Financial Preferred Portfolio Fund (PGF) are good vehicles to gain exposure to preferred stocks. Most of the issues they hold are in the financial sector.

Some investors also believe that the major US financial institutions would one day return to their former glory. This could mean that companies like Bank of America (BAC), Citigroup (C) and US Bancorp (USB) could yield very decent returns if they were to increase distributions to their 2007 levels. This option of getting exposure to financials is the riskiest of all, since most of the TARPed financial institutions are already paying billions in dividends to the Treasury every year. In addition to that, the Treasury and other strategic investors might elect to convert their preferred stock into common, which would dilute existing shareholders. Last but not least it is very difficult to forecast how the US banking industry would look like a few years from now. Just because a bank survives the meltdown, does not mean it would be a solid long-term investment. The strong gains off the March lows have definitely pushed financial stocks in overbought territory. Thus, if you believe that owning US banks provides you with the best exposure to the US financial sector, you might consider waiting to buy them on pullbacks.

These options could either be used on a standalone basis or in a combination. As a dividend growth investor I currently own mostly insurers and have a position in one of the Canadian banks. I might add to my Canadian exposure, which also provides international diversification for my portfolio.

Full Disclosure: Long AFL, CB and TD