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3 High-Yield Stocks to Counter U.S. Downgrade

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2. Diamond Offshore Drilling (DO - Get Report) is an oil-and-gas drilling contractor, with expertise in deepwater, harsh-environment and semisubmersible drilling.

Diamond's stock was an indirect casualty of the BP (BP) Gulf spill as its practices came under scrutiny and the area was closed for further operations. Houston-based Diamond has suffered an annualized share-price drop of 15% since 2008. Its stock has sunk 19% in the past 12 months, but has rallied 15% in 2011 as crude oil surpassed $100 a barrel. Fourth-quarter profit decreased 12% to $242 million, or $1.74 a share, as sales fell 5.6%. The operating margin fell from 50% to 40%, as Diamond's pricing faltered.

Diamond's stock receives lackluster reviews from analysts, with only 16% of those evaluating the company rating its stock "buy." The most bullish firm on Diamond is Goldman Sachs, which expects its stock to advance 29% to $98 within the next 12 months.

Diamond should be watched closely for a pullback. It is already cheap, but may become even cheaper if the long energy trade unwinds. The stock trades at a trailing earnings multiple of 11, a forward earnings multiple of 14 and a cash flow multiple of 8.2, signifying peer discounts of 58%, 32% and 59%, respectively. JPMorgan, which is bearish on Diamond and nearest competitor Transocean (RIG), fears another potential cut in the dividend, given Diamond's "conservative new build program" and its lack of "exposure to the high spec jackup market."

Diamond pays a quarterly dividend of around 13 cents, translating to an annual yield of just 0.7%. But, it also pays special quarterly dividends, which, admittedly, have fallen from a high of $1.88 in 2010 to 75 cents in the latest quarter. Nevertheless, the stock still offers a forward dividend yield of 4.6%, assuming the 75 cent special distribution is maintained. On a positive note, most of Diamond's fleet is contracted through 2011 and, according to skeptic JPMorgan, day rates are increasing, providing a potential bullish setup for the stock. Although Diamond may suffer further weakness, management is focused on shareholder returns. The dividend has grown 11% and 16%, annually, over a three- and five-year span, respectively.
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