The real-money portfolio I run for the Fool uses a screening process to find great stocks. Today, I'm on my 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)
KKR Financial Holdings (NYS: KFN)
Linn Energy (NAS: LINE)
Alliance Resource Partners
Cliffs Natural Resources (NYS: CLF)
Exelon (NYS: EXC)
Plains All American Pipeline
Data provided by S&P Capital IQ.
Pitney Bowes tops the screen for the third month in a row and continues to tempt with its 11.5% yield. But declining sales, negative tangible book value, and high amount of debt and goodwill on the balance sheet all have me steering clear.
Exelon is struggling a bit during this heat wave, according to my colleague Jim Royal. The nation's largest nuclear-energy producer, like all nuclear operators, needs water to cool things down. The heat apparently has limited the available sources, and Exelon has had to lower output -- total power output has declined 2.6% from the five-year average.
Finally, the new companies on the screen this month are KKR Financial, Hillshire Brands, Linn Energy, Cliffs Natural Resources, and Plains All American Pipeline. KKR is a "specialty finance company" that focuses on buying up collateralized loan obligations. Linn Energy is an independent oil and gas company with a reasonable valuation and a five-star CAPS rating. Cliffs mines iron ore and coal, and carries an extremely low forward price-to-earnings multiple of 5.3.
These 10 companies are now official candidates for my real-money portfolio. For more dividend ideas, you may also be interested in our special report, "The 3 Dow Stocks Dividend Investors Need." It's free -- just click here.
The article Looking for Safe High Yielders? originally appeared on Fool.com.
Fool analyst Rex Moore tweets but is not a twerp. He runs a real-money portfolio based on his screens. He owns no companies mentioned here. Motley Fool newsletter services have recommended buying shares of Exelon and Alliance Resource Partners. Motley Fool newsletter services have recommended creating a write covered straddle position in Exelon. The Motley Fool has a disclosure policy.We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.
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