How to Find the Best High-Dividend Stocks

Here are several lists, reflecting differing risk profiles; find the best fit for for you.

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The search for decent yet safe investment yields is more important than ever. This is no time to risk investment capital. Consumer prices are nearly flat and fears of deflation have been depressing stock values. It's widely expected that Social Security will forego a cost of living adjustment for the second straight year. And the Federal Reserve has repeatedly stressed its concern about the weak recovery and seems unlikely to raise interest rates anytime soon. So, if you want to find portfolio returns two or three percentage points above prevailing interest rates, you should consider looking for solid stock dividends.

[See The 100 Best Mutual Funds for the Long Term.]

Yield-hungry investors have been scouring the landscape for attractive stocks and dividend-based mutual funds. Still, it's possible to find yields that are much better than current returns on certificates of deposit and even longer-term government debt. The key, of course, is how much risk you're willing to accept in return for an attractive yield. Using Standard & Poor's MarketScope Advisor, several "10 best" lists of high-yielding stocks can be created. S&P now tracks nearly 14,000 equities around the world.

Among these MarketScope stocks, nearly 2,400 currently pay a dividend that provides an annualized rate of return of at least 5 percent, based on the price of the stock as of the market close on Aug. 13. Just picking the highest dividend yields from this list is not a good strategy. You, your broker, or financial advisor also must evaluate the sustainability of that payout. For example, the highest dividend yield on the S&P list was nearly 1,940 percent! Hey, that's nearly as good as a 2007 real estate hedge fund that bet against the housing market. But S&P says the company is losing money and the cumulative market value of all its shares is only $340,000. Don't call us, we'll call you.

Still, among these stocks are surely numerous companies you can invest in and still sleep at night. Just remember to do your homework. That should include the company's dividend history, which is not available in the MarketScope database. How long has it been continuously paying dividends? How has its payout level changed in the past 10 years? If a company has only been paying a dividend for a year or two, it doesn't pass my sleep test.

Before presenting several screened lists from S&P, here are two dividend lists from Morningstar. They reflect more conservative assumptions. Morningstar says it actively evaluates the stocks of 1,700 companies. "We look for stocks with dividend yields of at least 3 percent that haven't cut their dividend in the past five years," its screening tool explains. "We also throw out distressed companies, which are those least likely to maintain their dividend in the future."

[See 10 Great Dividend Stocks.]

Only 10 companies fit that description and earned 5-star or 4-star overall ratings from Morningstar. The 5-star companies are Johnson & Johnson, with a 3.46 percent dividend yield; Abbott Laboratories, 3.36 percent, and, Proctor & Gamble, 3.08 percent. The 4-star companies are Pitney Bowes, 7.44 percent; Automatic Data Processing, 3.39 percent; Lockheeed Martin, 3.38 percent; Intel, 3.20 percent; Bemis Company, 3.16 percent; VF Corp., 3.12 percent, and, Linear Technology, 3.11 percent.

Including all companies regardless of their Morningstar ratings produced a list of 81 firms. Here are the 10 with the highest current dividend yields: CenturyuLink, with a 7.91 percent dividend yield; Pitney Bowes, 7.44 percent; Genesis Energy, 7.10 percent; FFW Corp., 7.04 percent; Suburban Propane Partners, 6.98 percent; W.P. Carey & Co., 6.97 percent; T.C. Pipeline, 6.84 percent; Reynolds American, 6.30 percent; Kinder Morgan Energy Partners, 6.26 percent, and, Omaha Healthcare Investors, 6.15 percent.

Using the much larger S&P MarketScope Advisor list, here are the 10 best yields from among the 139 stocks that S&P currently rates in its most highly recommended "buy" category: Windstream Corp., with an 8.8 percent dividend yield; Kinder Morgan Energy Partners, 6.5 percent (it's not clear why this yield differs from that on the Morningstar list); AT&T, 6.3 percent; Altria Group, 6.2 percent; New York Community Bancorp (6.1 percent); Home Properties, 4.7 percent; People's United Financial, 4.6 percent; Nokia Corp., 4.5 percent; Oneok, 4 percent, and, Genuine Parts Co., 3.8 percent.

(I published this 5-star S&P screen late last year and most of the top 10 were the same: Calumet Specialty Products Partners, 10.1 percent dividend yield; Windstream, 10 percent; N.Y. Community Bancorp, 8.5 percent; Altria, 7.2 percent; Kinder Morgan, 7.2 percent; Home Properties, 6.1 percent; AT&T, 6 percent; Microchip Technologies, 5.1 percent; UDR Inc., 5 percent, and, Dominion Resources, 4.8 percent.)

Now, here are three higher-yielding and, odds are, riskier dividend lists culled from S&P MarketScope. Again, do more homework before buying these stocks. And remember the investor's wisest mantra: If it seems too good to be true, it usually is.

Stocks paying at least an 8 percent dividend with a five-year dividend growth record exceeding 10 percent (a total of only 14 companies qualified out of nearly 14,000 total): K-Sea Transportation Partners, 29.6 percent dividend yield; Tele Norte Leste Participacoes S.A., 22.5 percent; Capstead Mortgage, 18.1 percent; Annaly Capital Management, 15.1 percent; Torm A/S, 14.4 percent; Medallion Financial Corp., 12.3 percent; Penn West Energy Trust, 11.2 percent; BP Prudhoe Bay Royalty Trust, 10.1 percent; Frontier Communications Corp., 9.8 percent, and, Alaska Communications Systems Group, 9.4 percent.

Stocks paying at least an 8 percent dividend that S&P rates as having a "low" investment risk (15 companies overall qualified): Anworth Mortgage Asset, 15,3 percent current dividend yield; MFA Financial, 12.9 percent; Hilton Hotels, 12.6 percent; TICC Capital Corp., 9.6 percent; Great Northern Iron Ore Properties, 9.4 percent; Dynex Capital, 9.2 percent; Dillard's Capital Trust I, 8.9 percent; Double Eagle Petroleum, 8.9 percent; Vector Group Ltd., 8.5 percent, and, Webster Capital Trust I, 8.4 percent.

Stocks paying at least an 8 percent dividend that S&P projects will post earnings per share gains exceeding 10 percent over the next five years (a total of only 18 companies met these screening requirements): Premierwest Bancorp, 47.1 percent current dividend yield; Tele Norte Leste Participacoes S.A., 22.5 percent; China Digital TV Holding Co. Ltd., 16.5 percent; PDL Biopharma, 15.4 percent; Kohlberg Capital, 15.3 percent; Fifth Street Finance, 12.1 percent; Eagle Bancorp Montana, 11.4 percent; Ituran Location and Control Ltd., 10.9 percent; 10.9 percent; BGC Partners, 10.1 percent, and, Ares Capital, 9.7 percent.

While the MarketScope database did not include dividend histories, S&P did provide a history on the stocks in its S&P 500 Index. More than 70 companies have paid cash dividends each year since before the Depression, and another 90 have done so for more than 40 years. Of course, past performance is no guarantee. And companies can be on this list even if they've cut their dividends. Still, it's hard to argue that continuing to pay a dividend is a big deal if you've been doing it for more than a 125 years.

Here are the 10 S&P 500 stocks with the longest history of uninterrupted cash dividends: Bank of New York Mellon (since 1785!); current dividend yield is 1.4 percent); JPMorgan Chase & Co. (1827), 0.5 percent; U.S. Bancorp (1863), 0.9 percent; PNC Financial Services (1865), 0.7 percent; CIGNA Corp. (1867), 0.1 percent; American Express (1870), 1.7 percent; Stanley Black & Decker (1877), 2.4 percent; Exxon Mobil (1882), 2.9 percent; Eli Lilly (1885), 5.4 percent and, Consolidated Edison (1885), 5.0 percent.

[See 8 Realities of the New Retirement.]