Color to the Numbers: The Best High-Yield Stocks

Thanks to the Internet, and sites such as Yahoo! Finance and MSN Money, investors have more tools than ever to search for stock ideas by running screens. But screens often return numerous stocks that need to be weeded out, because the numbers don't tell the whole story. Maybe the massive growth at one company was due to one-time tax adjustments, not core operations, for instance.

Just like the color-by-numbers books kids doodle on, the picture for stocks pulled from any screen isn't clear until we add the appropriate hues. In this edition of "Color to the Numbers," we'll enlist Motley Fool CAPS to take a deeper look at a screen for high-yield dividend stocks.

Better a screen than a window
In CAPS, investors can see how the collective community rates a company and can compare that rating with the opinions of the very best All-Star stock pickers -- CAPS players with a ranking greater than 80. There are even pitch commentaries and blogs to lend detail to the bull and bear opinions. In all, CAPS gives investors qualitative resources far beyond mere numbers and tables.

To run this screen, we'll use the following criteria:

• Market cap of at least $1 billion.
• Price-to-earnings-to-growth (PEG) ratio of less than the S&P average of 1.5 (for the S&P 500, we use a trailing-12-month P/E of 17 and historical growth rate of 11%).
• Free cash flow of more than $100 million.
• A yield of at least 4%.

This should give us the cream of the crop in terms of stocks with a sizable, strong, cash-flowing business that returns a large portion of its spoils to shareholders. Of course, there may be very good reasons why these companies trade at low multiples. This is where CAPS can really help.

Opinions with the numbers
Here's a sampling from the list of stocks our screen pulled up today.

Upon this house ...
With the recent turmoil in housing, it's not surprising to find homebuilders popping up on our high-yield screen. With stock prices of DR Horton and other homebuilders at or near multi-year lows, dividend yields are rising as the stock prices fall. But great numbers pulled out of a screen can gloss over what's really happening under the surface.

In DR Horton's case, the company has continued to generate high levels of operating cash flow -- more than $2 billion in the last 15 months -- and has so far maintained its dividend in spite of the housing downturn. But while the company sees another $1 billion in cash flow in fiscal 2008, it concedes that the next year will be worse than this year, thanks to foreclosures and continued erosion of credit markets. DR Horton therefore said it plans to maintain the dividend, assuming the cash flow comes in as projected, but that it will review the situation on a quarterly basis. In other words, no promises.

No surprise, then, that homebuilders by and large have low one-star ratings from CAPS investors. With many investors believing the bloodletting is still in the early stages, almost 60% of CAPS members rating DR Horton have given it the thumbs-down.

High silicon yield
While it may not be surprising to find homebuilders in our screen results, finding a chip maker in the mix did get my Foolish antennae twitching. A manufacturer of specialized microcontroller chips, Microchip Technology has seen its stock plunge almost 30% in the last six months while its dividend continues to increase.

A big stock-selling party commenced when the company issued guidance in late October that included lower revenue and profit. Believe it or not, one of the "adverse" factors cited for the shortfall at the semiconductor maker was ... the housing glut. But the company intends to continue to raise its quarterly dividend, as well as take advantage of the lower stock price to buy back shares under an 11.5 million authorization. Despite the housing excuse, a solid contingent of CAPS investors sees an opportunity in the current weakness of Microchip, as 83 of the 94 investors rating the company believe it will beat the S&P going forward.

Let 75,000 investors be the judge
The collective wisdom of a huge pool of investors can quickly add color to a whitewashed page of numbers. But even with an entire community of qualified opinions acting as the judge, individual investors are still the jury and should perform their own research.

Want to see your favorite screen results run through the wringer in the CAPS community? It's free to tap the knowledge base and even give your own opinion in Motley Fool CAPS.