2 Big Dividend Payers on Sale Now

NEW YORK (TheStreet) -- Finding top-paying dividend stocks is simple; examining each one to weed out the rejects isn't. For the average buy-and-hold investor, dividend stocks are vastly superior to non-dividend stocks because even if the price stagnates you still make money.

The trick is to find the right balance between the stock's yield, growth, volatility and ability to continue paying dividends. If you don't enjoy reading SEC filings, that's OK. I'm happy to do it and share the results. Either way, you've got to pay attention to find the best deals and create an edge. If you have a full-time career like many part-time investors and traders, Ryan Mallory wrote a book for you: The Part-Time Trader: Trading Stocks as a Part-Time Venture (Wiley). I'm reviewing it now, and it's a must-read.

In my last dividend piece, 3 Big Dividend Payers With Rising Share Prices, I recommended Microsoft (MSFT), Corning (GLW) and Ford (F). As a group, they have outperformed the S&P 500 return while also paying a higher yield.

I consistently utilize filters that companies must pass before making my list. They all must meet or exceed the listed quantifiable criteria:

  • A stock must be liquid, and trade with a small bid-ask spread to avoid slippage.
  • The company must have a favorable dividend history and include at least one recent increase and/or growing earnings.
  • The company must have the ability to continue or increase distributions.
  • The long-term chart must display a bullish uptrend and a buying dip for value.

How can you best exploit the following list? Make sure the industry and the company match your investment objectives. If you can, use your current professional knowledge to garner a market edge when entering or exiting a position. Industry insiders can run circles around Wall Street if they take what they know and apply it wisely to the market.

Take a close look at two new recommended high-yield dividend stocks and their current value.

MCD Dividend Yield (TTM) Chart

McDonald's  (MCD)

Price To Book: 6.3

Earnings Payout Percentage: 56%

Background: McDonalds is the leading global foodservice retailer with more than 33,500 local restaurants, serving approximately 69 million people in 119 countries each day. Less than 20% of McDonalds' restaurants are corporate-owned.

McDonald's pays $3.24 annually in dividends for an exceptionally attractive yield of 3.4%.

Shares in the eatery have declined 4.2% over the last month, positioning investors for a buying dip. We are now able to acquire shares near $95, though earlier this year it was over $100. The daily chart appears bearish, with the price trading under the highly watched 200-day moving average. However, the daily is mainly for traders. Let's look at the weekly and monthly charts, which remain solidly bullish. The dividend payout is higher than I normally would reach for, but the brand and consistent profitability make it acceptable.

Analysts are far from a consensus. All else being equal, it's generally a bearish indication when the majority of analysts don't get behind a stock. The average analyst target price for McDonald's is $103.59. I think that's lower than it should be. I think $115 is reasonable as a one year target, and don't forget in the next year investors are anticipating $3.24 in dividends.

The last reported short interest is paltry; it's not a meaningful negative influence. Only 1.5% of the average trading float is now shorted.

MCD Payout Ratio (TTM) Chart

SO Dividend Yield (TTM) Chart

Southern Company (SO)

Price To Book: 1.9

Earnings Payout Percentage: 107%

Background: Southern Energy acquires, develops, builds, owns and operates power production and delivery facilities and provides energy-related services to utilities and industrial companies. Southern Energy businesses include independent power projects, integrated utilities, a distribution company, and energy trading. The company has a $36 billion market cap and trades an average of 5.6 million shares on a typical day.

SO Payout Ratio (TTM) Chart

This stock currently has an annualized dividend of $2.03, yielding 5%. At first glance, you may wonder why I'm including a company that is paying more than 100% of earnings in dividends. Normally that's a giant bright red neon sign that says "danger," but in this case it's the difference between trailing and forward earnings. Next year, earnings are expected to exceed dividends by at least 70 cents.

Shares declined 3.5% in the last month and down about 20% from last spring. From a technical analysis point of view, the daily chart is bearish, but the monthly chart remains bullish and at an area of support. The average analyst target price for Southern is $43.68. I place the one year price target at $45, and after adding in a 5% yield, you have the makings for southern hospitality at its finest.

Currently, the 2.7% short interest based on the float is inconsequential and not a large concern.

SO Profit Margin (Quarterly) Chart

At the time of publication, Weinstein had no positions in securities mentioned.

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

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