Winning the Quest for Yield

Stocks that pay meaningful dividends are still something of an anachronism. Even now that tax rates on stock dividends are lower, the average company in Morningstar's U.S. Market Index still pays out a paltry 1.6% 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 Morningstar.com'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 free cash flows equal to at least 7% of sales. All told, 22 stocks made it through the screen as of Nov. 23.

Here are some of the highlights:

Cadbury Schweppes PLC ADR (CSG)
Dividend Yield: 2.57%
Morningstar Rating: 5 Stars
Business Risk: Below Average
From the Analyst Report: "Cadbury will need to flawlessly integrate its expensive collection of recent acquisitions, especially its purchase of Adams, to create shareholder value. But we believe management is astute and up to the task. We would gladly invest in Cadbury shares in 5-star territory."

Coca-Cola (KO)
Dividend Yield: 2.43%
Morningstar Rating: 5 Stars
Business Risk: Below Average
From the Analyst Report: "Coca-Cola is currently suffering through what we see as a transitional period in the company's history. We think it will have to traverse a bumpy road in the short to medium term, but as proponents of long-term investments, we would buy the shares at a slight discount to our fair value estimate."

Colgate-Palmolive  (CL)
Dividend Yield: 2.1%
Morningstar Rating: 5 Stars
Business Risk: Below Average
From the Analyst Report: "We expect it will take some time before the company can fortify its competitive position. That said, the company is still a global leader in the oral care market segment, and it continues to deliver sales growth and market gains."

Pfizer (PFE)
Dividend Yield: 2.5%
Morningstar Rating: 5 Stars
Business Risk: Below Average
From the Analyst Report: "Pfizer has an unparalleled drug portfolio and a best-in-class salesforce. With its enormous financial and administrative resources to support research and development, the company should be able to deliver a continuing stream of differentiated drugs that will drive superior returns."

To run this screen and see all the stocks that passed, click here. The stocks mentioned above passed our screen as of Nov. 23. The results of the screen may change due to daily price fluctuations or other factors. After clicking, you can save the search for later use 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.)