Keep These Dividend Payers on Your Radar

Looking for income in today's stock market seems like it is becoming harder and harder. The yield on the S&P 500 is stuck around 2.00%, and though that might be better than investors can get in parts of the fixed-income market, it is hardly enough income to make people happy. However, even if the broad market isn't going to satisfy income cravings, there are still individual stocks that fit the bill.

First off, why are yields so depressed? The problem doesn't seem to be that stocks are too expensive; Morningstar's stock analyst team thinks equities are about 8.00% undervalued right now. One issue is that financials stocks aren't paying out the kind of income they used to; the financials sector currently has a yield of only 1.74% (as measured by the 12-month yield on  Financial Selector Sector SPDR (XLF)). Banks are in many ways still recovering from the 2008 crisis, and regulators have been hesitant to allow institutions to pay out a large share of earnings to shareholders. Instead, they are being asked to build up larger capital positions to protect the system in the case of another shock. This might not be a bad idea from a systemic-risk standpoint, but it reduces opportunities for dividend investors.

Outside of financials, other management teams have been equally cautious even without regulators breathing down their necks. After being forced to cut dividends during the downturn to reserve cash, many boards are now insisting that firms build up big cash cushions instead of paying that cash out. Until the fate of the world economy is clearer and the crisis moves further into the rearview mirror, it is hard to see boards becoming much more aggressive when it comes to payout ratios.

However, the fact that there isn't an embarrassment of riches of cheap, high-yield stocks today doesn't mean that investors should give up on dividends. There are still firms out there that are committed to returning cash to shareholders. Getting paid every quarter for holding a stock remains an attractive proposition. Dividend income is literally cash in the bank and can provide ballast to a stock portfolio in volatile markets. Morningstar director of personal finance Christine Benz recently discussed some tips to find a good dividend-focused mutual fund today, but individual stock investors can also create a solid income portfolio.

We used the Morningstar  Premium Stock Screener to look for equities with decent current yields (above 3.00%) and that have raised their dividends annually for the last five years. We added the consistent dividend growth screen to select for companies that are committed to paying out dividends in all sorts of market conditions. We also don't want to overpay, so we restricted our search to firms that have a Morningstar Rating for stocks of 4 stars or higher. Premium members can run the screen for themselves by  clicking here. Below are three stocks that passed.

 Kellogg (K)
| Projected Yield: 3.48% | Economic Moat: Narrow
From the  Premium Analyst Report:
Intense competitive pressures--particularly in the ready-to-eat cereal category--are taking a toll on Kellogg, but efficiency improvements and investments in marketing and product innovation should ultimately benefit the packaged-foods firm in this difficult operating environment, in our view.

 Sysco (SYY)
| Projected Yield: 3.58% | Economic Moat: Wide
From the  Premium Analyst Report:
Sysco is the leading food-service distributor in the United States and Canada, with around 17% share of this estimated $220 billion market. Although food distributing is generally a low-margin, capital-intensive business, economies of scale have allowed Sysco to post returns consistently on invested capital in excess of our estimate of the firm's cost of capital. Through more than 150 acquisitions since its founding about 40 years ago, Sysco has developed a wide-reaching distribution network over which to spread high fixed costs that no other competitor has been able to replicate.

 Abbott Laboratories (ABT)
| Projected Yield: 3.52% | Economic Moat: Wide
From the  Premium Analyst Report:
On the foundation of a wide lineup of patent-protected drugs, a leading diagnostics business, a strong nutritional division, and a top-tier vascular group, Abbott Laboratories has dug a wide economic moat. We expect these operating lines will continue to generate strong returns and drive growth. Furthermore, the company's decision to split itself into two is likely to result in two well-positioned companies (a drug company and a diversified health-care company) with strong competitive advantages.

Data as of Jan. 30, 2012.