Today, I'm going to pick out one dividend stock that I will believe will far outperform the S&P 500 -- with dividends reinvested -- between now and Dec. 31, 2012.

For this to happen, I will be picking from a pool of stocks that share three characteristics: They will fulfill basic human needs, which makes them recession-resistant; they will offer a yield of at least 3%; and they will have the possibility for strong price appreciation -- which is especially important since I'm investing with a one-year horizon.

Meet the contenders
In order to safeguard against the havoc a global recession could create on the economy, I went to the relatively stable industries of utilities and waste collection. Though demand may slow, I believe that even in a recession, people will still be turning on their lights at night, and they'll still want their garbage to be picked up in the morning.

From these two industries, I went looking for exciting candidates who were offering up yields of at least 3%. After vetting the candidates, I settled on these six possibilities. Below, I included information on their dividend payout, its safety, and their chance for price appreciation.

Company

Dividend Yield

Payout Ratio

Forward P/E

Price/Sales

Price/Book

Waste Management (NYS: WM)  4.3% 65%  13.4 1.1 2.4
Republic Services (NYS: RSG)  3.2% 57% 13.1 1.2 1.3
Veolia Environnement (NYS: VE)  11.5% 76% 10.3 0.1 0.6
Atlantic Power (NYS: AT)  8.4% N/A  N/A  7.3 2.4
Otter Tail (NAS: OTTR)  5.5% 135% 20.6 0.6  1.2
AmeriGas Partners (NYS: APU)  6.7% 126% 15.5 1.0 7.5

Source: Yahoo! Finance. N/A = not available; the company is both earnings and free-cash-flow negative.

Though the safety of a dividend payment (as measured by the payout ratio) wasn't one of my three characteristics, I simply can't ignore the fact that Atlantic Power, Otter Tail, and AmeriGas all pay out more than they take in via earnings or free cash flow.

That left me with my waste disposers, and there's no question that Veolia sticks out as an enticing candidate. It would have been very (small "f") foolish to choose Veolia just based on the chart above, but a deeper look at the business convinced me that this stock is primed for outperformance. Read below to see why.

A diversity of offerings
Based out of France, Veolia has its hand in many different businesses. Here's a breakdown of where revenues came from in 2010.

  • Water and sewage: This division -- which accounted for 33.7% of revenue in 2010 -- could be a major growth factor in the future. The company's services could help the growing global middle class get access to the clean water they'll come to expect on a daily basis.
  • Energy services: Encompassing heating and cooling networks, this accounted for 6.9% of revenue in 2010.
  • Environmental services: By far the largest segment of the company -- coming in at 52.4% of revenue -- this is, at its bare bones, the trash removal service that many people are familiar with.
  • Transportation: Though it is low-margin and low-revenue right now -- accounting for 7% of 2010 revenue -- some believe that transportation could be a boon in the future, when more municipalities wish to run their vehicles on Veolia's network.

So, what's the problem?
With so much diversity and potential upside -- in transportation and water/sewage -- some might be surprised to see that the company is trading for just 0.1 times sales. The answer for this downturn is threefold.

First, there was a collection of bad news that hurt the company over the past few years. Disappointing earnings, followed by the departure of a longtime CEO, and the discovery of an accounting error, which sparked fears of malfeasance, all took a toll.

Furthermore, Veolia's contracts are largely with municipalities, many of them in Europe. Unless you've been hiding under a rock, you know that anyone counting on payments from European municipalities could be playing with fire.

Finally, the company's dividend yield is likely to take a hit in the coming year. In Europe, companies tend to be far more flexible with their dividends than they are stateside. Veolia adjusts its dividend yearly to make sure it's sustainable. In 2009, just 42% of free cash flow was used to pay its dividend. In 2010, the figure was upped to 86%. Even our dividend guru James Early, who recently recommended the stock, concedes that "we'll see a dividend cut."

I see huge upside
With regard to all three forces pushing the stock down: I see far more upside than downside at today's prices. For starters, the accounting error that caused panic was small, and I don't think it's indicative of a systemic problem. Furthermore, I believe that even in the worst-case European scenario, trash collection and disposal contracts would be one of the last services to be cut.

I also think that the company has several avenues for growth, especially in their sewage treatment and desalinization services -- which could be in high demand in the developing regions of Asia.

And even though the dividend will likely be cut, I think it will still be substantial (over 3%), and I'm willing to reinvest those dividends with so much upside potential for price appreciation.

My plan
Between now and the end of the year, I'll be putting my own money into Veolia, via my Roth IRA. I'll also be making a CAPScall on my profile for Veolia. Hopefully, after doing your own due diligence, you'll consider doing the same.

If, however, you'd like some more traditional dividend ideas, I'd like to offer you access to our special free report: "Secure Your Future With 11 Rock-Solid Dividends." The report will give you the names of 11 companies our analysts believe will help guide your portfolio toward a comfortable retirement. It's yours today, absolutely free!

At the time this article was published Fool contributor Brian Stoffel does not own shares of any companies mentioned. He will be buying shares of Veolia between now and the end of the year. You can follow him on Twitter at @TMFStoffel.The Motley Fool owns shares of Waste Management. Motley Fool newsletter services have recommended buying shares of Veolia Environnement, Waste Management, Otter Tail, and Republic Services, and creating a write covered strangle position in Waste Management. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.


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