This article is part of ourRising Star Portfolios series.
My real-money Rising Star Portfolio uses a smart screening process to find great stocks. Today, we're on our monthly hunt for the most attractive high-yielding companies out there -- those with businesses strong enough to hopefully avoid a devastating dividend cut.
What's more, this screen -- like all my others -- is now being tracked and scored on its very own CAPS page, so we can begin to accumulate valuable data and see how it performs. Mark it as a favorite so you can follow along.
Most people now recognize the power of dividend investing. Higher-yielding stocks tend to offer higher returns over time than low- or no-yield stocks, according to research from Jeremy Siegel and others. In fact, the 20 best-performing survivor stocks from the original S&P 500 in 1957 are all dividend payers.
What's more, reinvesting dividends acts as a "bear-market protector and return accelerator," according to Siegel. The extra shares purchased and accumulated at higher dividend yields during down periods help protect portfolios in falling markets, and when these extra shares rise in value in good times, they accelerate returns.
As the recent economic crisis illustrated all too well, however, you can't buy just any high-yielding stock. Dividends that get cut or suspended entirely can wreak havoc on a stock price -- and thus your portfolio.
Reducing the risk
Fortunately, you can take several steps to lessen your chances of buying one of these train wrecks. James Early, advisor of our Motley Fool Income Investor service, suggests looking at the payout ratio for starters. That's simply the percentage of a company's net income used to pay its dividend. Obviously, the higher the payout ratio, the tougher it is for a company to meet its dividend obligation. James looks for a payout ratio below 80% for safer companies, and a sub-60% or even sub-50% payout for companies you consider risky.
To further stack the odds on your side, you can limit your search to companies that have grown their dividend over the past three years or so. That eliminates the less stable or erratic dividend payers.
I constructed a screen to find some promising high-yield, low-risk U.S. companies for further research. I made sure the stocks met the following criteria:
Market cap > $1 billion
Payout ratio < 60%
Three-year dividend growth > 0%
Here are the top 10 highest yielders the screen produced.
TAL International Group (NYS: TAL)
Exelon (NYS: EXC)
FirstEnergy (NYS: FE)
PPL (NYS: PPL)
Alliance Resource Partners
Eli Lilly (NYS: LLY)
Source: S&P Capital IQ
TAL International Group is involved in the leasing of those intermodal freight containers that can be transferred from truck to ship to rail without the need for loading and unloading. It's been around since 1963, but be aware it had to cut its dividend sharply in the depths of the economic crisis.
The other companies near the top -- W.P. Carey, Exelon, FirstEnergy, and PPL -- have also had some dramatic ups and downs throughout their history. Utilities in particular have seen more volatility than normal lately, with their dividend yields looking very attractive -- although Exelon faced some concerns last year over its nuclear power exposure.
If you're looking for rock solid safety, Eli Lilly and Avon are among those on the list that represent the type of payout history we're looking for: slow, steady, yet powerful over time. Lilly faces the same challenges of keeping its drug pipeline filled with good prospects as other pharma stocks, but it has plenty of promise.
These companies are now official candidates for my Rising Star Portfolio. To follow any of these companies, simply add them to your very own free, personalized watchlist. For more dividend ideas, you may also be interested in our special free report, "13 High-Yielding Stocks to Buy Today."
At the time thisarticle was published Fool analyst Rex Mooretweetsbut is not a twerp. He runs a real-moneyRising Star portfoliobased on his screens. He owns no companies mentioned here. The Motley Fool owns shares of Lockheed Martin.Motley Fool newsletter serviceshave recommended buying shares of Alliance Resource Partners and Exelon.Motley Fool newsletter serviceshave recommended creating a write covered strangle position in Exelon. Try any of our Foolish newsletterservicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.
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