High Yield Dividend Stocks

How do you go about looking for high yield dividend stocks?

Dividend yield alone is not sufficient to make investment decisions in a company. We look for certain other criteria that bolster a company's ability to continue to be profitable and grow their dividend payouts in the future.

Let's take you through the variables we use to identify sustainable stocks with high dividend yields.

The Criteria

The questions we ask when screening for high dividend yield stocks are:

• Has the dividend grown at least 5% over the last 5 years?

• Have the Earnings per Share (EPS) shown growth of at least 10% year over year for the last three years?

  This helps establish that the company is able to grow its earnings year over year.

• Has the company been able to grow its revenues by over 10% compared to the previous year?

  This shows that the company is deriving its earnings growth by increasing its sales and not just by creatively managing expenses.

• Has the company been able to generate free cash flow for at least the last two years in a row?

  Free cash flow is the money left over after capital expenditures are deducted from operating cash flow. It's found in the Cash Flow Statement.

  Free cash flow is an excellent indicator of the financial health of a company. It allows a company to pursue options that enhance shareholder value. One of these options is paying higher dividends.

• Does the company have an ROE of at least 15%?

  This shows that the company is putting shareholder equity to good use by deriving strong returns.

Stocks That Passed Our Screening

We used the Morningstar Premium Stock Screener with the above criteria.

Here is our Top 20 List of High Yield Dividend Stocks ...

Note: This list was compiled in mid-Feb, 2010.

You will notice that the list contains quite a diverse set of companies ... from Heavy Construction to Information Technology to Drug Manufacturers.

To wrap up, we looked at the different criteria for screening stocks with high dividend yield. Using these parameters, we picked 20 stocks that we consider to be good dividend earners.

By picking attractive dividend stocks using a balanced, fundamental approach like we've outlined had helped us choose stocks that have been real winners in the long run.

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