This week, I’m going to spotlight the year’s best-performing Top Picks.

Every year, we ask all of our Digest contributors to send us a recommendation of their single favorite stock to own in the coming year. Their submissions range from unknown small-caps to the past year’s winners, a broad range that reflects the wide variety of investing styles practiced by our contributors.

Once in July and again at the end of the year, we revisit the Top Picks to see what’s working.

As of this writing (just shy of the end of the year), the best-performing Top Pick, with a gain of 53%, is a small-cap technology company called Allot Communications (ALLT). Ian Wyatt, editor of Small Cap Investor PRO, recommended Allot, which made its gains in the first six months of 2011. So it was already a winner at mid-year, when Wyatt wrote in an update:

“I’m pleased with the continued growth of Allot Communications, which reported on Tuesday and beat earnings estimates by delivering EPS of $0.07. The company grew revenues by 38% over the comparable quarter of 2010, and by 6% sequentially. To bring more recent subscribers up to speed, Allot manages broadband networks to maximize their performance. Its customers are wireless cell phone operators around the world, and its competition includes companies like Blue Coat (BCSI) and Cisco Systems (CSCO). The company is growing because its solutions help service providers manage their networks more efficiently–its products solve the pains that come with an overloaded network. With massive growth in mobile technologies, I don’t see this trend ending anytime soon and believe Allot will continue to enjoy growing demand for its solutions. … There are now five analysts following Allot, and on average they believe the company will earn $0.26 in 2011 and $0.38 in 2012 on revenues of $71 million and $83 million, respectively. These projections would put revenue growth at 25% this year and 16% next. I think Allot will do better. I’ll bump up the price target on Allot to the consensus of $17.50–that’s around 15% higher than shares currently trade. Allot is a buy on weakness.”

Since then, Allot broke through the 17.50 level a few times, and even touched 19.15. Shares always meet resistance at those high levels though, and they are now back between 16 and 17. But as Wyatt wrote, this company is gaining admirers, and a strong move past 19 could signal the next phase of the upmove for ALLT. This is certainly one to keep an eye on.

The second-best performer to date is also a small-cap technology stock. This one doesn’t have any potential for new investors though: Global Defense Technology and Systems (GTEC) was acquired for $315 million in March 2011. The acquisition provided a quick 48% gain for subscribers who had bought the shares when Geoffrey Eiten, editor of OTC Growth Stock Watch, recommended them in our January Top Picks issue.

The third-best performing Top Pick is also a technology stock. But unlike ALLT and GTEC, IAC/Interactive Corp. (IACI) made fairly steady gains all year, even as the market thrashed up and down. Originally recommended in the Top Picks issue by David Fried, editor of The Buyback Letter, at 29.41, IACI is now trading in the low 40s. IAC/Interactive owns Ask.com and Match.com, in addition to other Internet properties. It’s hard to tell if the stock’s best days are behind or ahead of it–IACI’s momentum is choppy but upward, as evidenced by a pattern of higher highs and higher lows. Watch to see what IACI does when the market breaks out of its trading range in 2012 (hopefully to the upside).

The fourth-best performer overall was featured in Dividend Digest. Chunghwa Telecom Co. (CHT), recommended by Yiannis G. Mostrous in Global Investment Strategist, is up 35% year-to-date. Mostrous just updated his subscribers on Chunghwa Telecom last week, December 21, writing:

“Taiwan’s largest telecommunications provider Chunghwa Telecom in mid-December announced that its mobile communications division had crossed the 10-million subscriber mark. Chunghwa Telecom also announced that it would spend TWD6 billion (USD200 million) to boost its mobile network capacity–the first step on a path to cultivate a smartphone and ‘Internet of Things’ subscriber base of 10 million. Internet of Things refers to network-enabled objects, such as a refrigerator, and the web-based services that interact with these devices. In 2011, Chunghwa Telecom spent TWD4.8 billion (USD160 million) on expanding and improving its mobile network. The company also said it would contribute USD51 million to a consortium of Asian telecom companies to build high-speed submarine cables that will connect 11 areas in nine countries in the region. The Asia Pacific Gateway project will build an underwater fiber-optic network that will begin commercial service by 2014. The cables will stretch 100,000 kilometers and will link Taiwan, China, South Korea, Japan, Singapore, Malaysia, Thailand, Vietnam and Hong Kong. Chunghwa Telecom said that its November unconsolidated sales fell 1.34% year over year to TWD15.7 billion (USD519.9 million), without providing a reason for the decline. The company’s total revenue in the third quarter rose 9.5% year over year to USD1.9 billion, although net income declined 0.2% year over year to USD406.8 million. However, net income per American depositary receipt (ADR) rose 5% year over year to USD0.51, primarily due to a 20% reduction in outstanding shares. Chunghwa Telecom’s operating profit declined 3.9% year over year to USD473.3 million.

“The company’s mobile business accounted for USD810.2 million of total third-quarter revenue, an increase of 6.6% from the year-ago period. The company’s mobile subscriber base rose 4 percent year over year in the third quarter to 9.96 million, of which 5.83 million subscribers were third-generation (3G) technology users. These 3G users contributed to 40.5 percent yearly growth in mobile value-added services revenue, which came in at USD133.7 million in the quarter. The company expects its mobile Internet subscriber base to reach 1.47 million by the end of 2011 compared to 1.32 million at the end of the third quarter. The company’s Internet segment accounted for USD219.6 million in sales, up 0.6 percent year over year. The company is rapidly expanding its fiber network throughout Taiwan, with the aim of reaching 75% of the country’s population by the end of the year. The company’s broadband subscriber base was 4.48 million at the end of the third quarter. Of this total, 51.8% of broadband users had signed up for the company’s fiber network offerings. The company’s rapid expansion of fiber coverage allowed it to achieve 1 million movie-on-demand subscribers in November, one month earlier than predicted.

“Chunghwa Telecom controls 80% of Taiwan’s broadband market. The company is utterly dominant in the fixed-line market, holding a 96% share of the local fixed-line segment and 77% of the long-distance fixed-line market. The company’s domestic fixed-line segment grew revenue by 17.1% year over year to USD699.7 million in the third quarter, while the international fixed-line communications segment saw revenue decline by 6% to USD128.9 million. However, a recent government ruling has shifted the pricing right for landline-to-mobile phone calls in favor of fixed-line operators, which has boosted Chunghwa Telecom’s top line. Buy Chunghwa Telecom up to USD35.”

In addition to its appreciation potential, Chunghwa Telecom also offers large but intermittent dividends. Going forward, this company looks like a good pick for any investor.

In the eight months since these stocks were recommended, the Dow Jones Industrial Average has gained no value–as I write this it is down just over 1% since April 12.

These four dividend aristocrats, on the other hand, have not only gained value, they have also all made dividend payments since then.

The first, The McGraw Hill Companies (MHP), has paid three dividends of 25 cents each. If you’d bought at 39 on April 12, you’d have received 75 cents, for a yield of about 2% over the past eight months. Plus, the stock’s price has increased 10%, from 39 to 43.

Back in April, Patrick McKeough, editor of the Wall Street Stock Forecaster, recommended MHP. McKeough still rates the stock a buy.

McGraw-Hill is planning to break up into two companies next year: the company’s Standard & Poor’s division and other financial-information providers will become McGraw-Hill Markets, while the textbook-publishing side will become McGraw-Hill Education. McKeough sees the split in a positive light, writing in October: “Break-ups like this tend to work out well for investors, because the total value of the two new companies usually exceeds the value of the former parent over time.”

This year marked the 38th consecutive one in which MHP raised its quarterly dividend.

The second Dividend Aristocrat from April’s issue is The Chubb Corp. (CB), an insurer. The Chubb Corp. has paid two dividends of 39 cents since April, as well as gaining 10% in price. It is now trading at 68, above the target price of $65 that John Eade, an analyst for the Argus Weekly Staff Report, gave it back in February. In October, Eade raised his target to $75, and reiterated his BUY rating on The Chubb Corp.

The third outperformer since April is Abbott Laboratories (ABT), always a favorite among income investors. Since April 12, ABT has paid three dividends of 48 cents each and increased in price from 50 to 54, approximately 7%. Abbot was recommended by Ingrid Hendershot, editor of Hendershot Investments, as a Dividend Digest Top Pick for 2011, so we’ll have an update on the stock in our Top Picks for 2012 issue, coming out January 11. (If you’re not a Digest subscriber, but are thinking about becoming one, I encourage you to take action before January so you can receive this collection of the experts’ single best investment ideas for next year.)

Finally, the fourth April Dividend Aristocrat to beat the market is Johnson & Johnson (JNJ).  Mark Deschaine, editor of Deschaine & Company’s Viewpoint, who recommends dividend-paying blue chips for the long-term investor, recommended JNJ.

As he pointed out in his recommendation: “JNJ has been paying a dividend since 1944 and has increased it annually for over 47 years. … For every share you might have bought in 1979 at $0.85, you would now be receiving $2.16 in annual dividends, or more than 2.5 times your initial investment–each and every year–and growing to boot! Going forward, you can be sure we do not anticipate this kind of supercharged income growth. However, our analysis indicates that Johnson & Johnson should be able to continue to generate positive cash flow from its stable of products and continue to pay and increase its dividends for years to come. As long as that’s the case, and the price of the stock remains reasonable by our valuation measures; we’ll continue utilizing the dividend and dividend growth attributes of JNJ to provide growing income to our clients.”

That’s as true today as when he wrote it–that’s the beauty of owning dividend aristocrats. Since April, JNJ has gained approximately 7% in price, and paid out $1.71 in dividends, for an eight-month yield (based on April 12th’s closing price of 60) of about 3%.

There’s certainly something to be said for buying and holding this type of steady, dividend-paying stock. It certainly would have worked better than most strategies this year. If you think this approach might be for you, you might want to consider subscribing to the Dick Davis Dividend Digest, where all these stocks were recommended first. Click here to learn more!

And why is this worry a good thing?

Because, as all experienced investors know, bull markets climb a wall of worry!

And that’s what this bull market is doing now!

As a result, I’m more optimistic than at any time in the past few months, about both the short- and long-term prospects of the market.

And I’ve got a great stock to recommend to you!

It’s in the insurance business, which seems appropriate following the previous section on dogs.

Its name is Reinsurance Group of America (RGA).

And Roy Ward, the editor of Cabot Benjamin Graham Value Letter, recently recommended it. He wrote:

“Reinsurance Group of America (RGA) is the second largest provider of life reinsurance in the U.S. Reinsurance Group also offers annuity, critical care and group reinsurance. The company guarantees insurance contracts for insurance and other financial companies and sells its products in 25 countries around the world. The company also sells life and disability insurance to consumers in the U.S., Canada, and abroad. It has over $2.6 trillion of life reinsurance in force backed by a strong balance sheet with conservative bond investments.

“Reinsurance Group is in position to capitalize on the significant growth opportunities in the U.S., Canada, India and China. Revenues increased 1% and EPS rose 19% during the last 12-month period, spurred by improved market conditions and higher prices. We believe strong growth from its international operations as well as a boost from recent purchases will drive EPS higher by 6% during the next 12 months.

“RGA’s shares are clearly undervalued at 6.8 times current EPS with a 1.4% dividend yield. RGA shares sell at a huge 42% discount to current book value. The balance sheet is strong, enabling RGA to take advantage of additional opportunities in the reinsurance industry. Higher interest rates could add significant income from RGA’s conservatively invested bond holdings. We fully expect RGA’s stock price to increase to our Minimum Sell Price of 77.52 during the next one to two years. RGA is low risk.”

Sounds good to me. And I can add a few more details.

First, Roy has added the stock to his Classic Value Portfolio. This portfolio, composed of eight select holdings, has gained 28.2% in the past 24 months, compared to 16.8% for the Dow. Longer-term, the portfolio is up 173% since inception in November, 2002, compared to just 35.4% for the Dow.

Second, RGA had been trading as high as 64 back in July, so getting it at the current price is like getting a 22% discount.

And third, financial stocks were among the hardest-hit sectors this year, so stocks like RGA have a lot of upside potential.

For conservative, patient investors, I recommend it highly.

Even better, I recommend that you consider a no-risk trial subscription to Cabot Benjamin Graham Value Letter, so that you can get updates on RGA and other undervalued stocks every week!

For more details, click here.

I’ve been discussing the overall market a lot lately (if you didn’t catch last week’s market video, you can watch it here) so today I think we’ll ignore it–and focus on stocks that ignore it too (more or less). Below are three recommendations from the latest Dick Davis Dividend Digest. Each one of these three stocks is a conservative dividend payer with relatively low correlation to larger market moves. Sounds pretty good right about now, doesn’t it?

The first is Macquarie Infrastructure Company (MIC), which yields about 3%. MIC is one of the few stocks that has managed to stay above its 50-day moving average lately, and the strength has not gone unnoticed: it was recommended by two analysts in the latest Dividend Digest. The first was George Southerland, editor of Special Investment Situations, who wrote on October 25:

“Macquarie Infrastructure Co. owns and operates a handful of infrastructure assets consisting of relatively basic services where cash flows are predictable. The flagship asset is a 50% equity interest in NJ-based International-Matex Tank Terminals, or IMTT, that operates a bulk liquid storage terminal business that stores petroleum products and an array of chemicals. Capacity is over 43 million barrels, and the business isn’t particularly sensitive to the economy since storage contracts last from three to five years. IMTT enjoys a distinct competitive advantage as one of its main facilities (Bayonne) is located near New York harbor and can load and unload ships quickly due to the depth of the water in front of its docks. … A kicker here involves the dividend, currently at $0.20 per quarter for a 3.2% yield. Management is working with its partner in the IMTT investment to distribute excess capital that the business is generating. We anticipate an increased distribution probably beginning in Q1 2012, and could see the dividend nearly double within a year. Note also that a rising payout should prompt capital appreciation from the shares. MIC is a buy up to 26 and becomes particularly interesting on dips below 24.”

The second Macquarie recommendation came from Jennifer Dowty, a managing director and portfolio manager at Manulife Asset Management who writes for Investor’s Digest of Canada. On November 18, she wrote:

“On November 2, the company reported strong operational third-quarter results, with revenue climbing nearly 18% year-over-year. Five analysts rate Macquarie a ‘buy.’ Their average one-year price target is US$29.50 a share. A key catalyst for the company is speculation that management could substantially boost the dividend in early 2012. … The company has been unable to resolve a dispute regarding distributions with the co-owner of International-Matex Tank Terminals. A hearing on the issue is set for January 9 and the company anticipates the process will be completed by the end of March. But if the outcome favors Macquarie and the economy is good, the company is likely to raise the dividend by roughly $0.70 a share.”

Our next stock is very small–its market cap is only $78 million–but it is actually hitting new 52-week highs right now. White River Capital (RVR) pays a 4.5% dividend. On October 14, Eric Dany, editor of Stock Prospector, wrote:

“There’s more upside ahead for this sub-prime auto finance company because they are buying back shares and growing their financing portfolio. … The share repurchase program could remove 6.9% of the outstanding shares, which would boost book value to about $25.00. The sub-prime auto finance company operates Coastal Credit in 24 states. They acquire the subprime notes through franchised and independent auto dealers and then service the notes. … My earnings estimates are $2.25 in 2011 and $2.50 in 2012. With a P/E ratio of 10x my 12-18 month target price is $25.00 a share. … Strong Buy.”

RVR looks a little over-extended here though, so wait for a pullback before buying in.

Finally, a perennial Dividend Digest favorite, with a 7.6% yield, recommended by Roger S. Conrad and Elliott H. Gue in MLP Profits on October 28:

“Linn Energy (LINE) has hedged all of its oil output through 2013 and all of its natural-gas production through 2015. The firm has boosted its average daily hydrocarbon output by more than 30% over the past 12 months, leading to a 30% surge in third-quarter cash flow. These solid operating results enabled Linn Energy to cover its quarterly distribution by a margin of 1.1 to 1. Management expects to cover its full-year distribution 1.18 times. Management also continued to opportunistically lock in favorable pricing with new hedges. The firm also repurchased 530,000 units at an average price of just $32.76, some 15% below the current price. CEO Mark Ellis projects that Linn Energy’s capital investments will continue to deliver quarter-over-quarter production growth of at least 6%. … Few energy producers are lower-risk plays than Linn Energy LLC; the stock rates a buy up to 40.”

LINE can be volatile at times, but the 7%-plus yield is such a draw that most sell-offs are quickly corrected. The current weakness (such as it is) will probably prove to be another such buying opportunity. LINE looks like a good buy right here for the large dividend.

Until next time, hang in there.

P.S. Learn more about Macquarie Infrastructure Company (MIC), White River Capital (RVR) and Linn Energy (LINE), as well as other top high-yielding dividend-payers featured in Dick Davis Dividend Digest.

I am not an accounting professor by any means, so I’ll keep this simple. Every public company issues a balance sheet whenever sales and earnings are reported, which in the U.S. is always quarterly. Every balance sheet is divided into two sections: (1) Assets and (2) Liabilities and Shareholders’ Equity. One of the best ways to ascertain a company’s quality is to compare the book value per share to the stock’s current price.

I find that a lot of investors are unfamiliar with book value and book value per share, so, let’s at least become familiar with these terms. Book value is shareholder’s equity or retained earnings, which is a number found near the bottom of a company’s balance sheet. Book value per share is simply the shareholder’s equity or retained earnings divided by the number of common shares outstanding. (Price-to-book value can also indicate whether a stock is undervalued.)

Is book value per share important? By itself, no. But when compared to the company’s stock price, it’s enormously important. In short, quality companies with low price-to-book value per share ratios (P/BV) have outperformed companies with high ratios for the past three-, five- and 10-year periods. I recently scoured my databases to find the best companies with low P/BV ratios. I used several criteria to make my selections, narrowing the list of companies by also requiring: Value Line Financial Strength ratings of B++ or better, low price-to-earnings (P/E) ratios, dividend yields of 1.0% or higher and good earnings prospects for the next 12-month and five-year periods.

My search turned up investment choices quite different from companies appearing in most other investment advisories. I discovered six solid companies with low price-to-book value ratios selling at bargain prices, two of which are discussed below. You can find my analysis for the remaining four companies in the latest issue of my Cabot Benjamin Graham Value Letter.

Abbott Laboratories (ABT) is a very solid company with a reasonable stock price and an above average dividend.  The company is performing quite well with the help of strong sales in emerging markets and recent acquisitions. Sales will increase 6% and earnings will likely increase 10% during the next 12 months. Abbott’s price-to-earnings ratio, based on next 12-month earnings per share, is 10.7, which is quite reasonable. Earnings will continue to increase at a 10% pace in future years.

Abbott has paid dividends in every quarter since 1924 and increased its dividend every year since 1971–an amazing record indeed. The dividend yield is now 3.6%. Abbott’s price-to-book value ratio is 2.79, which seems high, but is fair for a leading company in the health care industry.

And there’s more. Abbott will split into two separate companies before the end of 2012. I believe the two companies will be worth more than the current company, and investors who wait will be justly rewarded!

Drug stocks, in general, have lagged the stock market in 2011, but lately investors are beginning to notice the low price-to-earnings ratios, high yields and steady earnings growth. I recommend buying ABT at or below 52.97, and selling when its stock price increases to 72.97.

Fred’s Inc. ‘A’ (FRED), founded in 1947 in Memphis, sells discount merchandise from 678 stores in 15 states in the Southeast and Midwest. Stores offer household goods, pharmacy items, food, pet supplies, clothing and linens. Average store size is modest, about 14,400 square feet.

Fred’s offers a large selection of generic drugs, which are in high demand and highly profitable. I expect sales to increase 5% and earnings to rise 12% during the next 12 months. The retailer has added pharmacies to half of its stores and is working to add pharmacies to most of its remaining stores.

FRED shares are undervalued at 12.8 times forward earnings per share and at 0.92 times book value. The dividend yield of 2.0% is decent. I expect the strong demand for merchandise offered at low prices to continue during the next several years. I advise buying FRED at or below 13.00 and selling when the stock price hits 19.61.

I will continue to follow stocks offering investors good value in my Cabot Benjamin Graham Value Letter. My next issue, coming soon, will focus on undervalued stocks with low P/E to growth (PEG) ratios.  I hope you won’t miss it!