Top-Rated High-Yield Stocks

It's certainly not difficult for investors to find high-yielding stocks these days, particularly among beaten-down financials. Freddie Mac (NYSE:FRE), for instance, features an incredible yield of more than 30%. 

As the saying goes, however, some things are too good to be true, and unfortunately that's the case with Freddie Mac's yield. After all, the yield looks at trailing dividends -- you know, before Freddie started having big problems. In fact, the company recently said it plans to slash its dividend to improve its capital base.

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 merits extra research. At present, the S&P 500 average yield is 2.2%, so this would mean yields above 6.6%.

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 Washington Mutual (NYSE:WM), which has all but eliminated 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 have 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-member CAPS community:

Source: Motley Fool CAPS as of Aug. 21, 2008.

Want to learn about other highly rated stocks? Sign up for Motley Fool CAPS today. Don't worry, it's 100% free, so enjoy your stay on us! Click here to start.