Your 2013 Dividend Guide: How to Find Fat Yields That Will Keep Growing

Corporate America -- all companies trading on the NYSE, NASD and AMEX -- shelled out 18% more in cash dividends last year, according to S&P Dow Jones Indices. And that excludes all those special dividends that were paid in late 2012 in anticipation of a change in dividend tax rates that in the end barely changed. (Only individuals making more than $400,000 and married couples bringing in more than $450,000 will have a higher dividend tax rate, but even so, it inches up to just 20% -- from 15% -- not the feared 39.6% income tax rate that had been a possibility pre-Cliff deal.)

Payouts for the 402 companies in the S&P 500 that deliver a dividend reached a record $281.5 billion last year, that’s a 17% pickup from 2011 and surpasses the 2008 high-water mark. And there seems to be more where that comes from. “At this point, even with many January payments paid in December, we should see 2013 as setting another record for regular cash dividends,” S&P dividend guru Howard Silverblatt said in a written statement.

That would be an impressive feat coming off of 2012’s performance. For the year, 2,883 companies either began paying a dividend or raised their existing dividend. That eclipses the 2,617 positive dividend actions in 2006, and is well ahead of the 1,953 positive changes in 2011.

One reason for the expected continuation of dividend good times is the fact that even with last year’s record payments, cash dividend payout ratios average 36%, well below the historic average of 52% according to Silverblatt. And with just the top 1% of earners now facing a (slightly) higher dividend tax rate, there’s no reason for companies to scale back their dividend routines in favor of stock repurchases.

The challenge for investors is to not overpay for that dividend. And to not get all googly eyed over a high dividend yield that obscures weak dividend growth. Sure, you want a competitive yield, but locking into a rising dividend story is how you make more money down the line.

A quick and easy spin through the YChart Stock Screener turned up 20 interesting possibilities. The parameters used: Market cap of at least $5 billion, a dividend yield between 3%-5% (Treasuries pay 1.9% interest, so you need ample recompense for the risk of stocks, but a super high yield often signals underlying fundamental issues for the stock) a PE ratio below 20 (that’s being generous as the market PE these days is around 14) and a dividend payout ratio below 40%. The final touch: focusing on stocks that earn an Attractive rating from YCharts’ proprietary valuation and fundamentals algos. You can rejigger those metrics to your own taste, or add on dozens more.

The highest dividend yielders on the list are energy companies including Total (TOT), Royal Dutch Shell (RDS.B) and ConocoPhillips (COP), all of which have yields over 4% and trade at sub-10 PE ratios right now. But none have been especially strong dividend growers of late. For a cheap energy stock with consistent dividend growth, Chevron (CVX) is the standout on the screen. Its current dividend yield is 3.3% and management has delivered dividend hikes at an inflation-whipping rate for the past 10 years:

CVX Dividend Chart

CVX Dividend data by YCharts

Intel (INTC) is a cash-rich techie on the screen, and its 4.2% dividend yield is more than double the payout on a 10-year Treasury. The chipmaker is selling at a sub-10 PE ratio, but as YCharts’ Dee Gill recently explained, while Intel is trading at a cheap multiple, it might be a dreaded value trap.

Rail company Norfolk-Southern (NSC) looks like a rare bird: a steady and impressive dividend growth policy -- the payout has increased more than 70% over the past five years -- combined with a strong rebound in post-recession profits, yet still trading at a below-market PE.

NSC Dividend Chart

NSC Dividend data by YCharts

The stock has struggled over the past year, in part due to its dependence on coal shipments (about 27% of revenue), which have been losing ground to the more competitive natural gas market. But cash flow remains well above its recession lows. If the economy manages to pick up a little more, that will be a nice tailwind for the cyclical rail sector.

Carla Fried, a senior contributing editor at ycharts.com, has covered investing for more than 25 years. Her work appears in The New York Times, Bloomberg.com and Money Magazine. She can be reached at editor@ycharts.com.

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