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Winning the Quest for Yield

These stocks have healthy payouts and the cash flows to support them.

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Stocks that pay meaningful dividends are still something of an anachronism. Even after the recent tax package significantly reduced tax rates on stock dividends, the average company in Morningstar's U.S. Market Index still pays out a paltry 1.5% yield. That's not much to write home about, especially if you're counting on regular payouts to supplement your income. 

But it's still possible to find companies that pay out decent dividends, if you dig around a bit. We wouldn't recommend just screening for companies with the highest yields in absolute terms--you'll end up with a motley crew of REITs, limited partnerships, and financially distressed firms that are bleeding red ink. Instead, focus on companies that pay out healthy dividends and generate enough cash to support them.

Using's  Premium Stock Screener, we began by searching for companies with dividend yields of at least 2%--about 30% higher than the typical stock. We also required companies to have a consistent record of increasing their payouts over the past four years.  Next, we limited the universe to companies with a consistent record of generating positive free cash flows. We also required a return on equity of at least 12% for the trailing 12 months, as well as a financial health grade of B or better. All told, 35 stocks made it through the screen as of Jan. 22.

Here are some of the highlights:

 Merck (MRK)
Dividend Yield: 3.16%
Morningstar Rating: 4 Stars
Business Risk: Average
From the  Analyst Report: "Merck faces a number of issues that may put a damper on the near-term outlook for the stock. However, we believe its solid research and development team and wide economic moat will help the company continue to outperform over the long term. We would pick up shares at a 20% discount to our fair value estimate."

 Cedar Fair LP (FUN) 
Dividend Yield: 5.64%
Morningstar Rating: 3 Stars
Business Risk: Average
From the  Analyst Report: "A wide economic moat and consistent free cash flow make Cedar Fair an outstanding long-term investment, in our opinion. We would consider the stock in the low $20s."

 GlaxoSmithKline PLC ADR (GSK)
Dividend Yield: 2.82%
Morningstar Rating: 3 Stars
Business Risk: Below Average
From the  Analyst Report: "Glaxo's early-stage pipeline, coupled with the company's eager attitude toward in-licensing from and partnering with other companies, should help Glaxo continue to generate strong cash flow for investors. We would be happy to invest at a 20% discount to our fair value estimate."

 Sara Lee (SLE)
Dividend Yield: 3.19%
Morningstar Rating: 3 Stars
Business Risk: Below Average
From the  Analyst Report: "Sara Lee may be stodgy, but its business throws off solid cash flow. We'd purchase the stock at a 30% discount to our fair value estimate of $26."

To run this screen and see all the stocks that passed, click  here. The stocks mentioned above passed our screen as of Jan. 22. The results of the screen may change due to daily price fluctuations or other factors. After clicking, you can save the search to use later by clicking the "Save Criteria" button in the bottom right-hand corner of the screen. (Note: You will need to be logged in as a Premium Member to view and save the complete screen.)

Amy C. Arnott does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.