Top-Rated High-Yield Stocks

It's certainly not difficult for investors to find high-yielding stocks these days, particularly among beaten-down financials. Idearc, for instance, features an incredible yield of more than 80%! 

As the saying goes, however, some things are too good to be true, and unfortunately that's the case with Idearc's yield. After all, the yield looks at trailing dividends -- you know, before the company started having big problems. In March, Idearc said it would discontinue its dividend altogether.

Toil and trouble
As a general rule of thumb, any dividend yield more than three times the market average should be approached with caution, and it definitely merits extra research. At present, the S&P 500 average yield is 2.2%, so any yields greater than 6.6% would occupy this danger zone.

See, what matters when it comes to high-yield investing is the sustainability and potential growth of a company's dividend. If dividends are important to you, you don't want to end up with a stock like Wachovia (NYSE: WB), which has cut its dividend. Among other things, it's important to look for stocks with sufficient dividend coverage, modest debt, and a history of increasing dividend payments.

Let's find some
To narrow our search to a few good names, we'll enlist the help of our Motley Fool CAPS screener and search for larger stocks with:

• Yields greater than 3.5%.
• Below-market price-to-earnings ratios.
• Four- and five-star CAPS ratings.

The last bullet point is particularly important, because we've found that four- and five-star stocks outperformed the market by a wide margin from November 2006 to July 2008.

Without further ado, here are a group of five top-rated high-yielding stocks, according to our 115,000-plus-member CAPS community:

Source: Motley Fool CAPS as of Sept. 4, 2008.

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