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Getting a Jump on a 10% Dividend Yield

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

By David Sterman

NEW YORK ( StreetAuthority) -- Looking at the current state of the economy, it looks like we're heading into another year of very low interest rates and insultingly low yields for most bonds and certificates of deposit (CDs).

These days, a stock with a dividend yield as low as 2% is enough to get many investors' attention. But that's not good enough for me. Many of these dividend-paying firms can do a lot better. They are retaining almost all of their earnings while still earmarking relatively small amounts for a dividend.

To see how often this happens, I scanned all of the companies in the S&P 600, focusing on stocks that paid 25% or less of their profits as a dividend. These companies could easily manage to boost that payout ratio up to 50% without jeopardizing their financial health. By doing so, small yields might suddenly become large yields, giving investors a reason to own these names ahead of time.

Take aeronautics firm AAR (AIR) as an example. The company has earned at least $1.21 a share in each of the past five years and is only now beginning to pay dividends again after having suspended it in fiscal (May) 2003.

In the most recent quarter, AAR earned 41 cents a share and issued a 7.5-cent quarterly dividend. That works out to be 30 cents a share in dividends on annualized basis, good for a 1.6% yield. But suppose management hiked the dividend so it equated to half of net income. With a forecast of $2 in earnings per share (EPS) in the current fiscal year, that dividend payout could be hiked to $1, equating to a more robust 5.3% yield.

In the table below, you'll note a group of fairly low-yielding stocks. But if all of them took their payout ratio up to 50%, then you'd be looking at much more impressive dividend yields.

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