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Start Your Own Dividend Fund and Beat the S&P 500

Stocks in this article: MATPEPPGMSFTINTC

BOSTON ( TheStreet Ratings) -- This month, I'm starting the Dividend Stars Portfolio, selected from a review of companies poised to provide excess returns over the next 12 to 24 months. The diversified 13-stock portfolio offers investors growth and income.

My Dividend Select screen picks companies that generate above-average dividend yields and show the potential for share-price appreciation. The monthly screen, begun Feb. 14, lists 100 companies that have collectively outperformed the S&P 500 by 4.2 percentage points. (Sign up for our Dividend and Income Newsletter.) The Dividend Stars Portfolio is derived from the Dividend Select screen.

This is an opportune time to assemble your own portfolio of stocks. Interest rates are so low, you're probably not making much on fixed-income securities such as certificates of deposit (CDs) or government bonds. As for stocks, even the best fund managers are producing middling gains because of seesawing markets, and there's a widespread notion that dividend-paying shares, such as those filtered by our screener, are the safest bets out there.

Today I'm highlighting two of the stocks featured in the Dividend Stars Portfolio. There will be more to come over the next few months.

Mattel (MAT) -- dividend yield: 3.30%

Mattel, the world's largest toy maker, holds a portfolio of the most iconic brands in the world. The company's top five includes Barbie, Hot Wheels, American Girl, Fisher Price and its newest acquisition, Thomas and Friends. Growth has been impressive in the face of a slowing economy here at home and in Europe, where Mattel collects 24% of revenue.

The company's acquisition of HIT Entertainment (which includes Thomas and Friends, Barney and others) makes sense, especially given management's proven expertise at developing and expanding brands (e.g., Monster High, American Girl). The European exposure concerns me, yet is on par with competitor exposure (Hasbro is at 26%), and toys historically have been somewhat bulletproof to economic malaise.

Management has been committed to returning cash to shareholders in the form of dividends and share repurchases. Mattel repurchased 16.3 million shares in the first nine months of the year. In addition, dividends increased 11% from 2010.

The company is trading at less than historic valuations and at similar levels to competitor Hasbro, despite superior growth and near-flawless execution by management over the past several years. With Mattel expected to post earnings per share of $2.36 in 2012, I use a historic price-to-earnings multiple of 14 to reach a 12-month target price of $33, nearly 18% upside from today.

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