5 Trending Dividend Payers

NEW YORK (TheStreet) -- Today's economic environment is almost nonstop "inflation on" or "inflation off."

Today may have weak economic numbers on housing and unemployment with deflation as the big news story, and the next day high fuel and food prices. Meanwhile, banks are paying yields that are much lower than many investors hoped for just a few years ago.

One solution to the local bank and credit union low-yield blues is through dividend-paying stocks. What is a high-yielding stock? The answer varies right along with inflation and risk-free yields (savings accounts, Treasuries).

Based on today's bank yields and inflation, I examined companies offering yields of 2.8% or higher, with a focus on 3.05% or greater. The annual rate of inflation is near 1.4%. If we can receive a rate of return that is double the rate of inflation, the amount of real, after-inflation wealth will grow significantly with time.

Over the short run, everyone agrees that banks are a relatively safer place to park your cash. However, over the long run, it's hard to make an argument that a personalized portfolio mix will play second fiddle to almost any other public investing opportunity.

Using history as our barometer to gauge what to expect in the future, dividend paying stocks offer the best that investing has to offer.

Dividend investing is more than just collecting a check every three months. Finding high-yield stocks can also lead you on the right path for capital gains. All else being equal, dividend-paying stocks tend to perform better compared to non-dividend stocks over in the long run. Dividend payers also naturally provide risk mitigation.

Ok, we know dividend-paying stocks can outperform, but it's not as effortless as casually selecting the highest-yielding stocks you can find and calling your broker. If you buy a high-yield stock paying 5% and the stocks drops 10% in the next year, the investment loses the luster. There are no guarantees in the stock market, but we can filter the list to find the ones with the most promise.

I start by focusing on stocks I already either trade or follow and that have a large dividend. I add in a screen for large-yield stocks and add the ones that meet the following criteria:
  • The company must have a history of increases in dividend payments.
  • The company needs to demonstrate a likely ability to continue paying at least the current dividend.
  • The chart must be in a bullish uptrend; there is no point in looking for an oversized yield if the shares are expected to drop as much or more in the next year.

PEP Revenue Chart PEP Revenue data by YCharts

PepsiCo ( PEP)

Background: Pepsi consists of: Frito-Lay Company, Pepsi-Cola Company, and Tropicana Products. PepsiCo trades a recent average of 4.7 million shares per day with a market cap of $112.7 billion.

52-Week Range: $58.50 - $73.66

Yield: 3%

Pepsi currently has an annualized dividend of $2.15. Over the last five years, the dividend has grown by an average of 11.8% per year. Even with the ups and downs of the market in the last five years, PepsiCo after dividends is a winner.

Over 70% of analysts who follow the company rate PepsiCo a buy or strong buy, and the average analyst target price for Pepsi is $74.40.

The widely followed 50-day moving average is well above the 200-day moving average. The share price is trending higher than the two key moving averages also. Pepsi's chart is a bullish pattern that many trend followers look for.

As a dividend investor, we don't want to buy right before the stock is about to fall. The trailing 12-month price-to-earnings ratio is 17.0, and the mean fiscal year estimate price-to-earnings ratio is 17.8, based on earnings of $4.07 per share this year. The earnings multiple is higher than many companies currently, but Pepsi has consistently increased the top and bottom lines over the last five years.

The payout ratio is well within the ability to continue paying the dividend into the foreseeable future.

Short-sellers are next to impossible to find. Short interest is so low I only include it to demonstrate the smart money is not betting against this company; 1% of the float is short based on the last reported numbers.

CTL Revenue Chart CTL Revenue data by YCharts

CenturyLink ( CTL)

Background:CenturyLink is a telecommunications company that provides broadband, voice and wireless services to consumers and businesses in the United States.. CenturyLink trades a recent average of 6.5 million shares per day with a market cap of $26.3 billion.

52-Week Range: $31.16 - $43.43

Yield: 6.86%

CenturyLink distributes$2.90 per share annualized in dividends. Over the last five years, the dividend has increased by an eye popping average of 63.3% per year.

Thirteen analysts rate CenturyLink a buy or strong buy out of 18 analysts. The average analyst target price for CenturyLink is $45.23.

CenturyLink is in a classic bull trend. The moving averages are moving higher and shareholders are happy. Trend followers love this pattern and will hold a position until a technical break results in a signal to exit.

CenturyLink sure looks good by many indications, but I include this one to demonstrate what a "yield trap" looks like to those that don't fully do their homework.

The first red flag found is the expected earnings this year. CenturyLink is expected to earn about $2.52, but is paying $2.90 a year in dividends. Simple math lets us know something has to give.

Sometimes a shortfall is temporary as a result of an acquisition, and the company experiences nonrecurring expenses. After the dust settles, income bounces back up and the dividend party continues.

One of the concerns about CenturyLink is that even after adding in expected forward earnings, the dividend appears at risk. Companies have "onetime expenses" all the time. The company has a fat dividend, and if everything goes as planned the dividend will likely continue for some time. If the company hits a speed bump, the dividend will be in serious trouble. It's just not worth it when you have so many others to choose from.

TSM Revenue Chart TSM Revenue data by YCharts

Taiwan Semiconductor ( TSM)

Background: Taiwan Semiconductor Manufacturer is the world's largest dedicated integrated circuit foundry. Taiwan Semiconductor trades an average of 8.5 million shares per day with a market cap of $76 billion.

52-Week Range: $11.26 - $16.15

Yield: 3.3%

Taiwan Semiconductor pays 40 cents per share in dividends. The dividend has grown by an average of 6.9% per year in the last five years. The dividend did dip in 2009, but quickly rebounded and is now as high as ever.

After testing the 200-day moving average a few times, the technical pattern is shaping up for another leg higher. It's a volatile industry though, and so investors will want to fasten their seatbelt with this one.

A fair amount of growth is priced in with a forward price-to-earnings ratio of 14.5. The earnings multiple is based on the mean fiscal year estimate of $1.01 per share.

Short interest is a nonfactor at a rate of 0.4% of the float.

KFT Revenue Chart KFT Revenue data by YCharts

Kraft Foods ( KFT)

Background: Kraft is the largest branded food and beverage company headquartered in the U.S. and the second largest in the world. The company was founded in 2000 and is based in Northfield, Ill. Kraft trades an average of 9.5 million shares per day with a market cap of $73.7 billion.

52-Week Range: $31.88 - $42.00

Yield: 2.79%

Kraft pays $1.16 in dividends per share a year. Examining the dividend history of a company is a great way to help understand what we may expect in the future. Of course, the past doesn't guarantee future dividends, but it does paint a useful picture. The three-year average amount they have distributed to shareholders per year is $1.16. Over the last five years, the dividend has grown by an average of 3.9% per year.

Most analysts rate KFT a buy or strong buy and none currently have a sell rating.

A fast-moving average above a given slower moving average is considered bullish. The 60-day moving average (some use a 50-day) is above the 200-day moving average and the share price are moving steadily at a medium pace higher.

Buying on dips usually works great in a classic bull trend. Trend followers love this pattern and will hold a position until a technical break results in a signal to exit.

The mean fiscal year estimate price-to-earnings ratio is 16.7, based on earnings of $2.49 per share this year. Earnings are well below the dividend rate, and after a long string of unchanged dividends, I would not be surprised to see an increase in 2013.

Kraft's $1.16 annualized dividends adds a mouthful of dividend flavor. Short interest is so low that there are little to no worries that big money betting against the company; 1% of the float is short based on the last reported numbers.

ITW Revenue Chart ITW Revenue data by YCharts

Illinois Tool Works ( ITW)

Background: Illinois Tool Works manufactures and markets a variety of products and systems that provide specific, problem-solving solutions for a diverse customer base worldwide. The company was founded in 1912 and is based in Glenview, Ill. Illinois Tool Works trades an average of three million shares per day with a market cap of $28 billion.

52-Week Range: $39.12 - $60.45

Yield: 2.56%

Illinois Tool Works currently has an annualized dividend of $1.44. Reviewing the last three years of dividends, the average yearly dividend declared was $1.31. Steady increases in dividends during the last five years have resulted in the dividend growing an average of 13.3% each year.

Nine of the 16 analysts covering the company give a buy recommendation, and analysts have pegged $61.36 as the mean price target.

From a technical perspective, the chart on ITW looks interesting. The widely followed 50-day moving average above the 200-day moving average is bullish. The price and the moving average trends are all bullish.

The mean fiscal year estimate price-to-earnings ratio is a relatively light 14.4, based on earnings of $4.12 per share this year. Top and bottom lines have moved up over the last few years. This is another company that the best was saved for last. I will add that buying on a dip probably makes a lot of sense, given that the stock had a nice run higher in the last couple of months.

Currently, the short interest based on the float is small and not a big concern. Short interest is 3.2%.

I use SEC.gov, Zacks.com, WSJ.com, Tradestation and Reuters for my data. PE is generally adjusted based on an average number of shares and for operational earnings.

The author does not hold a position in any stock mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

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