We frequently emphasize dividend-paying stocks in this column. Their appeal -- and the role they can play in a well balanced portfolio -- is well documented.
But suppose you wanted to find dividend plays with something extra: not only issues with well above-market yields but also with a steady history of raising their payouts each year and the potential for significant capital appreciation? Well, you've come to the right place.
We started out this week's screen by searching our database for those outfits with a dividend yield of at least 3.8%, more than twice that of the 1.84% yield on the S&P 500-stock index as of Mar. 29, 2006.
Then we wanted to make sure that history was on our side. We looked for companies that have increased their dividend rates in each of the last 10 years. Companies with a history of steady dividend increases tend to keep along that path, although there are no guarantees they will continue to do so.
But high yields and a history of rising payouts weren't enough for us. We wanted to ensure that these shares had appeal beyond the income angle.
We turned to two proprietary Standard & Poor's metrics to build our case. First, we sifted for those issues ranked 4 STARS (buy) or 5 STARS (strong buy) by Standard & Poor's equity analysts. Stocks with those designations are expected to outperform the overall market in the next 12 months.
Then we employed S&P's Fair Value model, a proprietary quantitative stock-ranking system. The model calculates a stock's weekly Fair Value -- the price at which a stock should trade at current market levels -- based on fundamental data such as corporate earnings and growth potential, price-to-book value, return on equity, and current yield relative to the S&P 500. We looked for those stocks ranked "4" or "5," indicating that these issues are significantly undervalued.
THE ENVELOPE, PLEASE.
When we finished crunching the numbers, these four names emerged: