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 -- hopefully, those with businesses strong enough to 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:
Pitney Bowes (NYS: PBI)
Alliance Resource Partners LP (NAS: ARLP)
TAL International Group
Exelon (NYS: EXC)
Plains All American Pipeline (NYS: PAA)
ConocoPhillips (NYS: COP)
Source: S&P Capital IQ.
Pitney Bowes appears on the screen for the first time, and frankly I'm surprised to see it here. It has a heavy debt load and the market is clearly wary about the stock, or it wouldn't be yielding near 11%. Management boasts 30 years of an increasing dividend, but I think the dividend is as shaky now as it's ever been and would approach this with caution.
The screen is full of energy stocks. Alliance Resource is down significantly the past few months, following the downward trend of just about every other coal stock out there. Its high yield and now-tempting valuation, along with all the negativity surrounding the industry, make it worth a look.
Plains All American Pipeline, which transports crude oil and refined products through pipelines, has seen outstanding 30% annual revenue growth the past couple of years. It also sports a reasonable forward P/E multiple of 16.
Exelon hopped onto my screen in January, and has been relatively flat since then. The largest generator of nuclear power in the U.S. can benefit heavily as other forms of energy become more expensive.
And then there are always the good, solid, major players such as ConocoPhillips. It provides stability as well as nice revenue growth for its 5.1% yield.
These 10 companies are now official candidates for my Rising Star portfolio. To follow any of these stocks, simply add them to your very own free, personalized watchlist. For more dividend ideas, you may also be interested in our special free report "Secure Your Future With 9 Rock-Solid Dividend Stocks."
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.Motley Fool newsletter serviceshave recommended buying shares of Exelon and Alliance Resource Partners.Motley Fool newsletter serviceshave recommended creating a write covered straddle position in Exelon. The Motley Fool has adisclosure policy. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.
Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.