Top 10 Dividend Yield Stocks With Upside

NEW YORK (TheStreet) -- American Capital Agency (AGNC), China Nepstar Chain Drugstore (NPD), Main Street Capital (MAIN), Hercules Technology Growth Capital (HTGC), Ares Capital (ARCC), EV Energy Partners (EVEP), PennantPark Investment (PNNT), UIL Holdings Corporation (UIL), Lorillard (LO) and United Parcel Service (UPS) have high dividends in the range of 2.6%-19.5%.

The selected companies come from diverse industries like financials, energy, utility, logistics and consumer goods. These companies churned sizable dividend rates in recent times, paying a higher proportion of their retained earnings as dividends. The selected group's earnings could average 15%-20% for 2011.

Most dividend income investors demand a dividend yield of 2%-3%, similar to the dividend yield of S&P 500. These 10 stocks have a dividend yield of 9%, topping the index average. The stocks considered here have an average upside potential of at least 7%, according to analysts' estimates.

10. United Parcel Service ( UPS) is a global logistics player offering a broad range of solutions including shipping and freight.

During 2010 fourth quarter, revenue grew to $13.42 billion, up 8.4% year-over-year, creating $1.8 billion in adjusted operating profit, or a 40% rise. Net income zoomed 44% in the December quarter compared to the same quarter in 2009.

Speaking about expansion plans, Scott Davis, UPS CEO, said in a press statement, "I'm encouraged by the opportunities we see in 2011 as UPS continues to expand into emerging markets while demonstrating the power of the logistics capabilities we've built worldwide."

The company paid total dividends of $1.8 billion. Dividend yield stood at 2.6% and dividend per share was $1.9. The stock has analysts' buy ratings of 75% and is currently trading at 15.6 times its estimated 2011 earnings.

9. Lorillard ( LO) is the third largest cigarette manufacturer in the U.S.

The company's board of directors approved a 16% increase in quarterly dividend on its common stock from $1.125 per share to $1.30 per share, payable on March 11, 2011 to stockholders on record as of March 1, 2011.

Regarding dividend increase, David H. Taylor, Lorillard's CFO, said in a press statement, "Based on the strength of our financial performance, we are very pleased to take this noteworthy step of again increasing our dividend, which in aggregate has resulted in a 30% increase in quarterly dividend rate over the last six months." He further adds, "This action underscores our confidence in Lorillard's business model and commitment of returning cash to our shareholders as evidenced by our targeted dividend payout ratio of 70-75% of earnings as well as our ongoing $1 billion share repurchase program."

The stock is trading at 9.7 times its estimated 2011 earnings with 55% analysts covering the stock recommending a buy.

8. UIL Holdings Corporation ( UIL), through its subsidiary, The United Illuminating Company, operates in two principal areas - transmission and distribution of electricity.

The company paid quarterly dividend of 43.2 cents per share. The company also garners dividends from its subsidiaries and on external financing. The company uses excess cash on hand for servicing debt and for paying common stock dividends to UIL shareholders.

Net profit margin and operating profit margin at the end of the third quarter stood at 6.7% and 14.7%, respectively. The stock gained 12% in the last one year, while analysts foresee further upside of 9% over the next one year. The stock has analysts' buy rating of 44% and is currently trading at 15 times its 2011 estimated earnings.

7. PennantPark Investment ( PNNT) is a business development company, investing principally in the U.S. middle market private companies in the form of senior secured loans, mezzanine debt and equity investments.

On February 2, 2011, the company announced quarterly dividend of 27 cents per share, with a record date of March 15, 2011 and a payable date of April 1, 2011.

For the quarter ended December 2010, investment income was $20 million, attributable to $7.3 million from senior secured loans, $3.2 million from second lien secured debt investments and $7.4 million from subordinated debt investments. This compares to investment income of $13.6 million, realized from $3.5 million from senior secured loans, $3.2 million from second lien secured debt investments and $5.4 million from subordinated debt investments.

Of the 14 analysts covering the stock, 9 gave a buy rating. Dividend yield for 2010 stood at 8.5%, while dividend per share was $1 per share. The stock is trading at 10.4 times its 2011 estimated earnings.

6. EV Energy Partners ( EVEP) is engaged in the acquisition, development and production of oil and natural gas properties.

During the third quarter, adjusted earnings before interest, tax, depreciation, amortization and exploration expenses stood at $37.2 million, an 11% increase over the third quarter of 2009. Distributable cash flow for the quarter was $24 million, up 22.4% from the third quarter of 2009 and 4.3% vs. 2010 second quarter.

The company reported net income of $58.1 million for 2010 third quarter. For the third quarter of 2009, net loss was $2.8 million.

On the company's acquisitions, John Walker, CEO, stated in a press statement, "EVEP has announced over $560 million of acquisitions in 2010. Quarter to quarter we were able to maintain our production levels and are currently focused on integrating our Mid-Continent region acquisition. With the recent announcement of our intention to acquire assets in the Barnett Shale, EVEP will have four core operating areas and substantial opportunities for growth in production and distributable cash flow."

The stock's dividend yield for 2010 was 8.6% and dividend per share stood was $3. The stock is trading at 17.5 times its estimated 2011 earnings.

5. Ares Capital ( ARCC) is a closed-end, non-diversified management investment company. The company is a specialty finance company that provides integrated debt and equity financing solutions to middle market companies in the U.S.

For the fourth quarter, Ares Capital reported net income of $128.4 million. Net investment income for the third quarter was $71.2 million. Net realized and unrealized gains were $57.2 million during the quarter.

The company declared fourth quarter dividend of 35 cents per share. Dividend yield for 2010 stood at 8.9% and dividend per share for the same period was $1.5. Dividend payout ratio was 75% at the end of the December quarter.

Of the 18 analysts covering the stock, 13 have a buy rating. As per analysts' consensus, the stock has a further upside of 9% and is trading at 11.7 times its 2011 estimated earnings.

4. Hercules Technology Growth Capital ( HTGC) is a leading specialty finance company addressing the capital needs of venture capital and private equity backed companies in the technology, clean technology and life science industries.

During 2010 third quarter, total investment income increased 8% to $15.6 million, compared to $14.5 million in the second quarter. Besides, net investment income rose 19% to $8.1 million during the quarter, compared to $6.9 million in the second quarter. Net investment income per share was 23 cents for the third quarter, up 21% on a per share basis, compared to the second quarter of 2010.

The company's board of directors declared fourth quarter cash dividend of 20 cents per share, payable on December 17, 2010, to shareholders of record as of November 10, 2010. The stock is trading at 10 times its estimated 2011 earnings.

3. Main Street Capital ( MAIN) is a principal investment firm providing long-term debt and equity capital to lower middle market companies.

During 2010 third quarter, total investment income increased 100% to $9 million, compared with $4.5 million in the corresponding period of 2009. Distributable net investment income was $5.2 million, representing a 73% rise from the third quarter of 2009. The distributable net realized income of $3.7 million represented a 16% increase from the third quarter of 2009. Net asset value stood at $237.7 million at the end of the September quarter, compared to $185.8 million at the end of June.

The company paid dividends of 37.5 cents per share, or 12.5 cents per share, for each month of July, August and September 2010. For the first nine months of 2010, total dividend paid was $1.18 per share. The stock appreciated 35% in the last one year and is trading at 13.7 times its estimated 2011 earnings.

2. China Nepstar Chain Drugstore ( NPD) is China's largest retail drugstore chain that provides pharmacy services and a variety of other merchandise including over-the-counter drugs.

For 2010 third quarter, revenue came in at $89 million, or a 7.3% year-over-year increase compared to the third quarter of 2009. Gross margin was 49.8%, compared to 49.6% in the third quarter of 2009. Net income increased to $2 million from a loss reported in the second quarter of 2010.

The company declared a special cash dividend of 30 cents per American Depositary Share, representing a total value of $31 million to shareholders and is payable by February 28, 2011. Dividend yield and dividend per share for 2010 stood at 12.8% and $1.9 per share, respectively.

1. American Capital Agency ( AGNC) is a real estate investment trust (REIT). AGNC earns income primarily from investing in residential mortgage pass-through securities and collateralized mortgage obligations.

During December 2010, the company declared a dividend of $1.4 per share for 2010 fourth quarter. Since its May 2008 IPO, the company has paid a total of $364 million.

Malon Wilkus, AGNC CEO, said in a press statement, "We delivered a 33% economic return to our shareholders in 2010, counting dividends paid plus book value appreciation and a 34% return on equity."

Of the 15 analysts covering the stock, 10 had a buy rating. With a dividend payout ratio of 71% and dividend yield of 19.5% in 2010, the stock is recommended for investors with an eye on dividend income. The stock is trading at 6.5 times its estimated 2011 earnings.

>To see these stocks in action, visit the Top 10 Dividend Stocks With Upside portfolio on Stockpickr.

This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.

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