3 Must-Own Stocks for 2012 and 1 to Avoid

Today, I'm about to slam one favorite stock of dividend investors, but I'll come back with three more stocks, including two dividend payers, that look poised for a prosperous new year.

Kimberly-Clark (NYS: KMB) , step right up.

The company behind Kleenex and Huggies has rewarded dividend investors well in the past, compounding its dividend at 7.5% annually over the last five years. But you should beware of one disturbing trend: Kimberly-Clark is now earning about what it did a decade ago -- $1.7 billion compared to $1.6 billion in 2001.

And that's not just cherry-picking; over the past decade, net income has been range-bound, fluctuating from $1.5 billion to $1.9 billion. But how is the company managing to consistently boost its dividend? Two ways: (1) using free cash flow and debt to reduce share count, and (2) increasing its dividend payout ratio, from 37% in 2001 to 65% in the last four quarters.

In the not-too-distant future and without some earnings growth, Kimberly-Clark won't be able to manage those healthy dividend increases so safely. That's not likely to happen in 2012, but commodities prices have been really hurting the company's bottom line.

Kimberly-Clark shows why it's important to reevaluate the fundamental performance of your companies at least annually and find new companies that can treat you right. So out with the old, and in with the new -- three stocks that should be nice to your portfolio in 2012.

McDonald's (NYS: MCD)
The Golden Arches has done nothing but deliver for investors over the past year, up a meaty 32%, and it's positioned well to ride the wave of globalization to an ever-increasing share price and dividend.

McDonald's fares well in almost any economic climate, putting up strong same-store sales every quarter in every region. During lean times, consumers turn to Mickey D's for low-priced meals, but even when the economy perks up, the restaurateur still packs 'em in.

You can see that in its share price, which was a rock in the 2008-2009 financial crisis. Recession? What recession? That stability should be a boon for investors if things get rough in 2012.

While peer Yum! Brands (NYS: YUM) generated over 40% of its operating profit from China in the last year, McDonald's is not overly reliant on the Middle Kingdom for its profitability. It also means the company still has huge room for growth there. And in contrast to Kimberly-Clark, McDonald's has grown earnings at a 13% annual clip over the last five years.

That has helped the company increase its dividend by nearly 20% annually over the last half-decade. With a 2.9% yield and a commitment to pay out all of its free cash flow to investors, McDonald's looks like a strong play for 2012. It trades at 19 times earnings -- not exactly cheap, but the best blue chips rarely are.

Southwestern Energy (NYS: SWN) With natural gas prices at multiyear lows, Southwestern might seem like an odd pick. But that's exactly when you want to buy one of the best operators. In times of weak gas prices, the lowest-cost producers are the safe place to invest, since they can weather the downturns best. Eventually, low prices will put inefficient companies out of work, leaving the best standing. Southwestern is one of the most efficient companies out there.

Unlike Kimberly-Clark, Southwestern has a strong record of growing income over the last decade, from just $35 million in 2001 to more than $600 million over the last four quarters. And while low gas prices have taken their toll, Southwestern has hedged a significant chunk of its production at much more favorable rates (above $5 per million cubic feet) through 2013. That means Southwestern should be able to keep those profits pumping in 2012.

Now near its 52-week low, the stock trades at less than seven times operating cash flow and sports a relatively clean balance sheet, with just $1.3 billion in debt against a market cap of $11.4 billion. Southwestern also just announced a huge new oil play in Arkansas and Louisiana called the Brown Dense, and it holds 460,000 net acres. With oil at much more attractive levels than natural gas, the play could create substantial value for shareholders.

Annaly Capital (NYS: NLY) My final must-own for 2012 is Annaly, a mortgage REIT that pays out a hefty dividend like peers Armour Residential (NYS: ARR) and American Capital Agency (NAS: AGNC) .

Annaly looks like a great play for 2012 because the Federal Reserve has announced that interest rates will remain low through at least mid-2013 due to high unemployment and sluggish growth. Those low interest rates mean that Annaly's funding costs should remain cheap, allowing it to rack up a rate spread, the difference between what it borrows and what it receives in interest.

Annaly pays out 14.4%, and even though its yield is lower than those of Armour and American Capital, Annaly looks like the best of the mortgage REIT lot. In contrast to Annaly, Armour has a spotty record of growing book value per share, and American Capital has only been around since 2008.

While those rivals opened shop in the last few years, Annaly has a relatively long track record of creating book value dating back to 1997. So it's seen the ups and downs of the market and can navigate them deftly.

Foolish bottom line
Those are three great plays -- including two dividend stocks -- for the coming year. Want more great ideas? If dividends are your game, then we have a brand-new free report from The Motley Fool's expert analysts called "Secure Your Future With 11 Rock-Solid Dividend Stocks." Today I invite you to download it at no cost to you. Get instant access to the names of these 11 high-yielders -- it's free.

At the time this article was published Jim Royal, Ph.D., owns shares of McDonald's and Annaly. The Motley Fool owns shares of Yum! Brands and Annaly. Motley Fool newsletter services have recommended buying shares of Kimberly-Clark, Annaly, Yum! Brands, and McDonald's. Motley Fool newsletter services have recommended writing puts in Southwestern Energy. 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.

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