10 Best Dow Dividend Stocks for 2012

Tickers in this article: KO MMM JNJ IBM UTX XOM MCD PG HPQ CAT
NEW YORK ( TheStreet) -- When it comes to the Dow Jones Industrial Average , time and technology stocks make fools of us all. So, dear reader, if you're approaching this article with a healthy dose of skepticism: good.

Nobody can tell the future, certainly not this author -- rather, the following stock picks are modeled using a combination of arithmetic and historical precedent. If you're interested in seeing how my past Dow picks have fared, skip to the last page of this article. I hold my feet to the fire.

In attempting to identify the best Dow dividend stocks for 2012, here are the criteria I've used to arrive at a list of 10 :

1.) Each stock must have a liability-adjusted cash flow yield * 1.5 times greater than the yield of a 10-year U.S. Treasury note.

2.) Each stock must have a return on invested capital greater than 10% (using five-year historical cash flows).

3.) Each stock must show a positive total return (including dividends) over the past 10 years.

4.) The dividend yield of the stock must be less than the liability-adjusted cash flow yield. In other words, cash flow must support the dividend.

Remember, this list is constructed using only quantitative criteria (in other words, strictly by the numbers). That said, a little color has been added to each of the companies mentioned, which are ordered from most expensive to least.

As always, model portfolios should not be treated as gospel; rather, use them as a starting point for your own research. Similarly, all investors should apply their own valuation and qualitative criteria to determine what constitutes a "good buy."

*5-Year Average Free Cash Flow / ((Outstanding Shares x Per Share Price) + (Liabilities - Cash)) -- Free cash flow data is sourced from each respective company's annual filing. Outstanding shares and asset/liability data is sourced from each respective company's most recent quarterly filing.

10. McDonald's

Liability Adjusted Cash Flow Yield : 3.2%

Dividend Yield : 3%

LACFY/10-Year Treasury Yield : 1.55

Return on Invested Capital : 15%

It's hard to imagine that McDonald's(MCD) traded for less than $13 per share as recently as 2003. As this stock approaches the $100 mark, investors are left to wonder if McDonald's is one of Benjamin Graham's "goodwill giants" (a stock so ingrained in American culture, that it can march upward indefinitely) -- or, if changing consumer tastes (for instance, a move toward healthier eating) will one day derail the world's leading burger magnate.

In June 2010, I called McDonald's an " indefinite hold " -- not much has changed since then. This stock is not particularly cheap, but continues to deliver impressive returns on invested capital; all the more admirable for an industry susceptible to commodity inflation and breathable margins.

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