What a year! If nothing major happens in the next week or so, it looks like the S&P 500  will finish the year down by about 3.6%. Try to be careful as you jump for joy.

It’s hard to argue against the fact that there’s a sideways bias to the market. So how do you make money? Savvy investors have embraced the beauty and power of dividends. And that’s exactly where I plan to keep searching for investment ideas in 2012.

Next year, I’d stay away from utilities and integrated oil companies for the most part. Utilities look OK from an interest rate and regulatory standpoint, but many stocks such as Southern Company (NYSE: SO) and Consolidated Edison (NYSE: ED) look a little pricey from a valuation standpoint. As for integrated oil stocks, I think a strengthening dollar (thanks to the euro crisis) will continue to be a problem for oil prices (oil and other commodities are priced in dollars). Stick a fork in this trade. It’s done for now…

So… what will work?

Big… Big Pharma — In the past few years, smart investors who stayed defensive have been well compensated. That’s still a good strategy. But it will also pay to play defense with an eye on growth. Large drug companies fit this sleeve. My favorite in this space is still Eli Lilly (NYSE: LLY), which I wrote about earlier this year. Lilly shares have had a more than respectable year, with a total return of about 23%. The company is still sitting on mountains of cash and has a full pipeline of new drugs, half of which are in some sort of regulatory review. The stock still looks cheap with a forward price to earnings (P/E) ratio of less than 10 and a 4.8% dividend yield.

The Two “T’s”–Technology and Telecom — The smartphone will continue to reign supreme as Google’s (Nasdaq: GOOG) Android platform and Apple’s (Nasdaq: AAPL) iOS continue to duke it out. The real beneficiaries, ironically, aren’t these two stocks.

I’m not making any predictions of about either of these stocks one way or the other. Let others do that. The three names that stand to gain the most from the smartphone war are AT&T (NYSE: T), Vodafone Group PLC (NYSE: VOD) and Intel (Nasdaq: INTC).

Look for AT&T to gain subscriber share thanks to Apple’s sudden, post-Steve Jobs burst of democratization with free iPhone 3’s for all. AT&T shares trade at a reasonable forward P/E ratio of less than 12 and carry a 6% dividend yield. For a global play, I like mobile giant Vodafone. With a 45% ownership stake in U.S. wireless provider Verizon (NYSE: VZ), Vodafone shares also offer exposure to growing frontier mobile phone markets in Africa and the Middle East as well as the more developed Asia-Pacific and Eastern European emerging markets. They are also a major presence in developed Europe, as well. The stock offers compelling value with a forward P/E ratio of 9.5 and a dividend yield of 5.4%.

Profiting from the rise of the smartphone will be the chip makers. Already the king of desktop and laptop semis, tech giant Intel is making a more than concerted push into not just the wireless device processor space but anything that requires a microprocessor: automobiles, appliances — you name it.

Few companies are positioned to leverage their expertise as Intel. With a commitment to spend nearly $9 billion on capital investment in the next few years, expect good things to happen. Even though the stock has had a nice run this year, up 11% exclusive of dividends, Intel shares still look cheap with a forward P/E ratio of less than 10. The 3.6% dividend is a nice bonus, especially with the company developing a habit of raising the dividend — they’ve bumped it an average of 16.5% annually in the past five years. [This is one of the primary reasons StreetAuthority co-Founder Paul Tracy calls Intel a “forever stock.”]

And one of the most ridiculous values available…
I’ll go out on a limb on this one. Some of the more irrational investment bargains lying on the “Reduced for Quick Sale” table are Bank of America (NYSE: BAC) bonds and preferred stocks.

As markets panicked back and forth this year, BofA common stock was beaten down to the $5 neighborhood. The debt and preferreds took a similar drubbing. The difference is the income. BAC shares don’t even yield 1%. However, bonds such as the Bank of America 5.7% Internotes that mature on Feb. 15, 2028, currently trade for around 83 cents on the dollar ($830 for a $1,000 face value bond) and yield about 6.9%. They’re rated “BBB+/BAA2,” which is investment grade. Some preferred shares trade at a 25% discount to their par value of $25 and yield 7.8% and carry a “BB+/BAA3” rating. Half of that is investment grade.

There’s a lot of fear out there concerning BofA, which is probably why Warren Buffett stepped up to invest in this particular name. It’s cheap and a great franchise. There’s probably a decent trade in the bonds and the preferreds. The attractive yields will also compensate the investor for their risk.

Risks to Consider: Annual predictions are always dependent on big “IFs.” The biggest if out there is probably the European situation. Resolution to the crisis is touch-and-go at best on a daily basis. If the wheels come off, expect shockwaves on our shores. And with the U.S. gross domestic product expected to grow at maybe 2% in 2012, our economy is vulnerable to a recession. Even the best run companies are affected by downturns. Lower P/E, high quality, dividend-paying stocks can offer some protection.

Due to their volatile nature, the Bank of America bonds and preferreds are susceptible to credit-rating downgrades. Is a downgrade below investment grade a possibility? These days, very little is surprising. Like the Boy Scouts say… “Be prepared.”

Action To Take –> After an ambivalent 2011, many investors are either exhausted and ready to throw in the towel or others are still searching for the magic bullet. Don’t do either. Focus on high quality, good yield and value. All of the names I’ve recommended trade at P/E ratios that are lower than the S&P 500 and have greater dividend yields than the index, too. This allows more room for P/E expansion (resulting in price appreciation), and enhanced yield will always add to total return. They’re also quality, highly-liquid, name brand companies.