The real-money portfolio I run for the Fool uses a screening process to find great stocks. Today, we're on our monthly hunt for the most attractive high-yielding companies out there -- hopefully, those with businesses strong enough to avoid a devastating dividend cut.
What's more, this screen -- like all my others -- is now being tracked and scored on its very own CAPS page, so we can begin to accumulate valuable data and see how it performs. Mark it as a favorite so you can follow along.
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 help protect portfolios in falling markets, and when these extra shares rise in value in good times, they accelerate returns.
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 sub-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 U.S. companies for further research. I made sure the stocks met the following criteria:
- Market cap > $1 billion.
- Payout ratio < 60%.
- Three-year dividend growth > 0%.
Here are the top 10 highest yielders the screen produced:
Alliance Resource Partners
TAL International Group
|Plains All American Pipeline||$12,662||60%||12%||5.3%|
|Sunoco Logistics Partners||$3,637||51%||30%||4.9%|
Source: S&P Capital IQ.
Pitney Bowes tops the screen for the second month in a row. Last month, I expressed concern about its heavy debt load and wondered if it would have to cut its dividend. I still have concerns, but will note it's up 10% in that time.
Alliance Resource remains the worst-performing stock since I started tracking the screen back in January. It's down 27%, but I think most of the bad news racking the coal industry is priced in. The 7.4% yield and lower entry point make Alliance compelling.
Besides it nice yield, fellow Fool Brian Stoffel makes the case that TAL International has decent upside for price appreciation as well. He bases that on the oft-maligned PEG ratio, but a forward price-to-earnings multiple of eight supports his case. Meanwhile, Sean Williams points out in an excellent article that demand for Exelon's resources isn't going away for a long time -- and you can include PPL in that batch, as well.
These 10 companies are now official candidates for my Rising Star portfolio. To follow any of these stocks, simply add them to your very own free, personalized watchlist. For more dividend ideas, you may also be interested in our special report, "Secure Your Future With 9 Rock-Solid Dividend Stocks." It's free -- just click here.
Motley Fool newsletter services have recommended buying shares of Alliance Resource Partners, ONEOK Partners, and Exelon. Motley Fool newsletter services have recommended creating a write covered straddle position in Exelon. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.