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Tickers in this Article: MRK, VZ, NOK, PFE, PM
Dividends can be a boon for investors in supplementing income. When a company makes dividend payments, it may signal two things. First, it indicates the organization is in relatively good health. Second, a company that pays a dividend sends a signal that its shareholders are important and that the company wants to take care of them. (Explore the arguments for and against company dividend policy, and learn how companies determine how much to pay out, in our related article How And Why Do Companies Pay Dividends?)

The bad part about dividends, however, is that they aren't guaranteed. During difficult times a company may decide to cut or suspend its dividends without warning, and shareholders that relied on them as a source of income are out of luck.

Companies With Forward Annual Dividend Yields Over 5%
With that in mind, I set out to screen for companies that have a forward annual dividend yield in excess of 5%. My goal was to find investments that may have the potential to put some coin back in investors' pockets during these tough times. These five stocks from the Investopedia.com stock screener may warrant closer inspection:

Company Name
Market Cap.
Forward Annual Dividend Yield
Merck & Co.
(NYSE:MRK)
$60.3 billion
5.3%
Nokia(NYSE:NOK)
$56.0 billion
5.3%
Pfizer(NYSE:PFE)
$117.1 billion
7.4%
Philip Morris (NYSE:PM)
$84.6 billion
5.2%
Verizon Communications
(NYSE:VZ)
$90.3 billion
5.8%
Data as of market close January 13, 2009 from the Investopedia Stock Screener

Merck was, not too long ago, one of the most revered pharmaceutical companies. That's not to say that the company doesn't still have a big name and command respect, because it does. However, a series of mega mergers and a lack of an exciting pipeline have diminished a fair amount of interest in the company.

Merck Has Several Things Going For It
But don't count Merck out just yet. For starters, the company was founded in 1891. Of course, prior longevity is no guarantee of future well-being. However, the company has seen its share of ups and downs over the years and survived.

Second, it has several high-profile drugs under its umbrella. For example, products you might have heard of include:
COZAAR®/HYZAAR®2 - medicines for treating hypertension;
GARDASIL® - vaccine for preventing cervical cancer and genital warts;
JANUVIA® - medicine for treating type 2 diabetes; and
SINGULAIR® - once-a-day oral medicine for treating asthma, allergic rhinitis and exercise-induced bronchoconstriction.

Third, the stock appears pretty cheap. At present the company trades at about 8.4 times the current fiscal year estimate of $3.30 a share, and similarly at roughly 8.4 times the current '09 estimate of $3.27. Plus, in the next five years, according to data on Yahoo Finance, the company is expected to grow at almost 4.6% per annum. For a company of Merck's size (almost $24 billion in sales expected in fiscal '08), that's pretty good.

Billions In Cash/Cash Equivalents
Another thing that intrigues me about Merck is that according to its last 10-Q (for the September quarter), it had more than $6.8 billion in cash/cash equivalents and short-term investments. I see this as a plus because of what the company might potentially do with its money. It could use cash to make acquisitions, repurchase stock or simply hold onto it for a rainy day. It may also help limit the downside potential. (To learn more about analyzing stocks in this volatile sector, be sure to check out our Biotechnology Industry Handbook.)

Plus, There's The Dividend
The forward annual dividend yield, per the chart above, is 5.3%. That's something that I think warrants attention, particularly in this market environment. Again, while the dividend is not guaranteed, it does potentially sweeten the deal.

My biggest criticism of Merck is that I think management and IR need to get off the dime and seriously make their case to retail and institutional investors. Given what is going on in the market these days, the company will almost certainly have to fight for attention.

Bottom Line
Dividend-paying stocks can be a boon for investors. The five stocks listed above have a high forward annual dividend yield and may deserve a closer look.

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