Color to the Numbers: The Best High-Yield Stocks

Thanks to the Internet and sites such as Yahoo! and MSN Money, investors have more tools than ever to search for stock ideas by running screens of stock databases. 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 and not core operations. Or maybe the screen didn't include the latest announcement that a dividend was canceled.

Just like the color-by-numbers books kids doodle on, the picture for stocks pulled from any screen is not clear until the appropriate color is added to the page. In this edition of "Color to the Numbers," we'll enlist Motley Fool CAPS to take a Foolish look at a screen for high-yield dividend stocks to see which stocks may be worth investigating further, and which should be cast aside.

Better a screen than a window
The community of knowledgeable investors who rate stocks in CAPS will help us in our search for high-yield dividend stocks. By pulling up a quote on a particular stock in CAPS, investors can see at a glance how the collective community rates a company today. Additionally, investors can see how the very best All-Star stock pickers -- CAPS players with a ranking above 80 -- rate a given stock. There's even pitch commentary and blogs that give details behind bull and bear opinions. This gives investors much more qualitative resources than just numbers and tables.

So let's take a look at our high-yield screen for today and a handful of the top candidates it returned. 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 1.75.
• Free cash flow of more than $100 million.
• A yield of greater than 4%.

This should give us the cream of the crop in terms of stocks with a sizable and strong, cash-flowing business that returns a sizable portion of its spoils to shareholders. We'll also use the PEG ratio to look for companies that still have good growth opportunities ahead compared to their earnings multiple. Of course, there may be very good reasons why these companies trade at low multiples. (Hint: 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.

Topping out the list from today's screen with a $15.5 billion market cap is copper and metals mining concern Southern Copper. With rising commodity prices, the company has been on a roll the past five years, returning investors a jaw-dropping 1,539%. CAPS investors still favor Southern Copper to outperform the S&P going forward, with 432 of 438 all-star players giving it an outperform rating. One primary concern with all mining companies is whether larger economic issues will push down the price of metals and affect the company's margins. Yet even with this risk, CAPS investors cite expected demand from emerging markets such as China and Brazil as reasons to believe Southern Copper will stay on its current growth path.

Another high-yielding company gaining five-star respect from the CAPS community is investment firm and Motley Fool Income Investor pick American Capital Strategies. The company is riding the wave of popularity in private equity and corporate financing. With more than $11 billion in alternative assets under management, American Capital is second only to Fortress (NYSE:FIG) in size as a publicly traded asset management company. With the company trading at almost 40% above the midpoint of its forecasted net asset value (NAV) of $32.90 to $35.90 by year-end 2007, it's not cheap. But investors see the healthy 7.7% yield from a constantly increasing dividend and strong track record of quality deals making up for the rich price.

Filling in the bottom slots of today's screen picks are a handful of banking firms that -- despite a yield of more than 4% for each -- fail to garner much love from CAPS investors. BB&T, Regions Financial, and National City have all been through the financial wringer in the last several years and struggled to provide any meaningful return to investors. While the numbers from the screen look just peachy, woes in the mortgage banking market and the specter of bad loans keeps these stocks on many investors black list, including eight out of 10 Wall Street analysts on the record as being bearish on National City.

Let 29,000 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.

American Capital is only one of more than a dozen companies sporting a yield higher than 6% on the Motley Fool Income Investor pick list. To see what other companies make the cut, take a free 30-day trial.

Fool contributor Dave Mock does his best to color within the lines but reserves his right to artistic expression. He owns no shares of companies mentioned here. Dave is the author of The Qualcomm Equation. National City and BB&T are also Motley Fool Income Investor picks. The Fool's disclosure policy doesn't see color or the wart on your nose.