This article is part of our Rising Star Portfolios series.

My real-money Rising Star portfolio uses a smart screening process to find great stocks. Today, we're going hunting for the most attractive high-yielding companies out there -- stocks strong enough to survive even a devastating dividend cut.

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 act as a protector in falling markets, and when these extra shares rise in value, they can accelerate returns in good times.

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 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 companies for further research. I made sure the stocks met the following criteria:

  1. Market cap > $1 billion
  2. Payout ratio < 60%
  3. Three-year dividend growth > 0%

Here are the top 10 highest yielders the screen produced:

Company

Market Cap (in millions)

Payout Ratio

3-year Cumulative Dividend Growth

Dividend Yield

Hudson City Bancorp (Nasdaq: HCBK)

$5,193

55%

82%

6.1%

AT&T (NYSE: T)

$173,754

50%

15%

6%

Eli Lilly (NYSE: LLY)

$39,835

43%

15%

5.7%

Sunoco Logistics Partners (NYSE: SXL)

$2,845

41%

36%

5.5%

Exelon (NYSE: EXC)

$26,614

54%

19%

5.2%

Entergy

$11,907

48%

26%

5%

DPL

$3,144

48%

16%

5%

DTE Energy

$8,047

57%

3%

4.7%

AGL Resources

$3,042

57%

7%

4.6%

Universal (NYSE: UVV)

$1,022

39%

7%

4.5%

Source: Capital IQ.

Another interesting company to consider is Werner Enterprises. If you count special dividends, which it has paid for the past three years, it would top this list with a yield of 7%. However, management says in Werner's 10-K that it cannot guarantee that the yearly special dividend will continue, so I decided to exclude it from the table.

These companies are now official candidates for my Rising Stars portfolio. It's worth noting that three of my current recommendations also passed this screen: Abbott Labs (NYSE: ABT) (yielding 4%), Johnson & Johnson (3.7%), and Coca-Cola (2.9%) -- so I think my "multivitamin portfolio" is already off to a great start.

To read about my latest Rising Stars buy, go here. You can also keep up by visiting my discussion board and following me on Twitter.

Exelon, Johnson & Johnson, and Coca-Cola are Motley Fool Inside Value choices. AGL Resources, Johnson & Johnson, and Coca-Cola are Motley Fool Income Investor recommendations. Motley Fool Options has recommended a diagonal call position on Johnson & Johnson. The Fool owns shares of Abbott Laboratories, Coca-Cola, and Johnson & Johnson. Motley Fool Alpha LLC owns shares of Abbott Laboratories and Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days.

Fool analyst Rex Moore yields approximately 3.2 kilograms of brainpower per donut consumed. Of the companies mentioned here, he owns shares of Johnson & Johnson. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.