Yield for these stocks!

[notiCIas]

Yield for these stocks!

With Treasury yields below 4%, it's time to look at dividend-paying stocks with growth potential.

June 3, 2005: 11:54 AM EDT
By Paul R. La Monica, CNN/Money senior writer


NEW YORK (CNN/Money) - Bonds are supposed to be attractive because of the steady income they provide.

But with investors worried about a possible slowdown in the economy, fears that were heightened after Friday's disappointing May jobs report, the yield on the benchmark 10-Year U.S. Treasury is now about 3.83 percent, the lowest it has been since April 2004.

"We have a hard time believing that the 10-year represents great value," said Tony Rodriguez, head of fixed income for First American Funds in Minneapolis.

So with that in mind, we figured there have to be some dividend-paying stocks out there that should offer more attractive total returns than Treasury bonds. After all, with a stock, you should have the extra benefit of appreciation in share price that often comes with earnings gains.

There is a bit of a myth that companies which pay dividends are stodgy firms with little in the way of exciting growth opportunities. But according to a recent report from Charles Schwab, that's not necessarily the case.

"Dividend payers have historically outperformed non-dividend payers. What's more, dividend-paying stocks tend to hold up better in periods of declining earnings growth," the report said.

To identify some potential stock winners that pay healthy dividends, we ran a quick screen on the Thomson/Baseline database to look for companies that have yields above 4 percent and expected earnings gains of at least 10 percent annually, on average, for the next few years.

Several well-known companies in industries that are known for high yields came up, such as telecom BellSouth (Research), financial services firms US Bancorp (Research) and Washington Mutual (Research) and real estate investment trusts (REITS) like mall operator The Mills Corp. (Research)

But some quirkier names that you might not expect to sport decent dividends also popped up.

Movie chain operator Regal Entertainment Group (Research), for example, could be a decent bet for an investor hungry for a big yield. The stock pays a dividend that yields 6.3 percent a year and analysts are projecting an earnings increase of 10 percent a year for the next few years.

United Online (Research), which owns Internet service providers NetZero and Juno, also made the list. This one is a bit of a surprise since tech companies don't often pay dividends. They usually prefer to reinvest their profits in order to finance growth initiatives.

But last month, citing strong cash flows, the company announced it would begin paying a 20-cent per share quarterly dividend. If United continues to pay that four times a year, the yield works out to a whopping 7.1 percent. The company's earnings are expected to grow at about a 10 percent rate for the next few years.

Yield-hungry investors might also want to pull the trigger on firearms maker Sturm, Ruger (Research). The company, known for its Ruger pistols, shotguns and rifles, pays a dividend that yields 4.8 percent. Its earnings are also forecast to rise at about a 10 percent clip for the next few years.

Another area that offers high yields, but not great earnings growth prospects for the immediate future, is the pharmaceutical sector. Drug stocks have been beaten down during the past year but James Denney, manager of the Electric City Value fund, thinks that some stocks are now trading at attractive enough valuations and have high enough yields to make them worth buying.

Denney specifically cites Merck (Research) and Bristol Myers Squibb (Research), which both have yields above 4 percent, as stocks that are worth buying for their dividends.

"If you can be patient and wait for a turnaround, you get a nice dividend to hold you over with these stocks. I don't understand why you would want to be in a bond since the total returns would be lower," he said.

Investors searching for a nice dividend shouldn't limit themselves to domestic companies though. There are also plenty of yield opportunities in foreign stocks that trade on U.S. stock exchanges as well.

European telecoms Deutsche Telekom (Research), Royal KPN (Research) and Portugal Telecom (Research) all have dividend yields in excess of 4 percent and are expected to post double-digit earnings gains for the foreseeable future.

And several Chinese stocks, most notably in the red-hot energy sector, came up on the list as well, including oil companies China Petroleum and Chemica (Research)l and PetroChina (Research) and utility Huaneng Power (Research).

"Searching for diversified yields, both in and outside the U.S., is the way to go. Many investors have discovered this," said Linda Duessel, co-manager of the Federated Equity Income fund.