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 right 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 and 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 $250 million.
• Price-to-earnings-to-growth (PEG) ratio of less than the S&P average of 1.75.
• Free cash flow of more than $50 million.
• A yield greater than 4%.

This should give us the cream of the crop in terms of stocks with a 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 in spite of 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 sample of the stocks our screen pulled up today.

Before we dig into some of these companies, investors should note the two highest-yielding stocks on the list. The screen returned a whopping yield of 13.6% for Terra Nitrogen and 12.0% for Fremont General.

This is a little misleading, however, and shows one of the flaws of screens that is worth pointing out. Since Yahoo!'s screen and many other financial sites take the latest dividend paid by a company and then annualize it, investors may incorrectly assume that this yield represents regular dividends paid in the past year or one that can be counted on in the future.

Not so, Fool. After more than a decade of regular quarterly dividends, Fremont General hasn't paid a dividend since January. And Terra Nitrogen's cash distribution varies depending on company earnings and expenditures. With everything from gas prices to weather affecting its bottom line, investors should not count on a $3 dividend every quarter. With this color added to these numbers, investors should weigh these high yields appropriately against the other companies that have been paying, and even increasing, dividends on a regular basis.

At the top of our list of high-yielding stocks is coal producer and Motley Fool Income Investor recommendation Alliance Resource Partners. The company operates coal mines in the eastern United States and markets different grades of coal to utilities and industrial customers. While the company reported a 14% growth in net income in its most recent quarter, coal production has been less than desirable due to increased activity in meeting safety regulations in the company's mines. Even near-term oversupply in coal markets hasn't squashed CAPS investors' enthusiasm for the company, and many see the long-term demand for coal in electrical utilities as reason to be bullish.

But not every high-yielding company rates well in the CAPS community. Investors are taking World Wrestling Entertainment to the mat with a low one-star rating. Concerns ranging from an aging fan base to competition from the Ultimate Fighting Championship have given 29 out of 43 CAPS All-Stars reasons to believe the stock will underperform the S&P going forward. The company's forays into the box office movie business haven't gone well either, even with distribution partners News Corp. (NYSE:NWS) and Lions Gate Entertainment backing them up. But not every investor thinks the WWE is pinned just yet -- many still see tremendous value in the brand and think it's only a matter of time before that value breaks the current chokehold. In the meantime, investors will be receiving a nice $0.24 quarterly dividend.

Let 60,000 investors be the judges
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 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.

Alliance Resource Partners 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. Popular is also a Motley Fool Income Investor pick. Safety Insurance Group is a Stock Advisor pick. The Fool's disclosure policy doesn't see color or the wart on your nose.