In order to assign a rating to stocks, Morningstar "uses projections of the company's future performance" and determines if the intrinsic value of the share corresponds to the current market price. Other factors that are integral to the rating process include the riskiness of the shares and a variety of other quantitative and qualitative components which affect the cash flows of the corporation. Such an analysis would help determine whether the stock is undervalued or overvalued.

IN PICTURES: 5 Tips To Reading The Balance Sheet

Choosing those stocks which are based on the criteria of high analyst praise, those that are undervalued and high dividend payouts should prove to be a solid addition to an investment portfolio.

Energy Dividends
First Energy Corp. (NYSE:FE) and Energy Transfer Partners (NYSE:ETP) have a five-star and four-star Morningstar rating, respectively. Although revenues have been decreasing on a year-over-year basis and FE was recently downgraded by Jefferies from "hold" to "underperform", the stock has lost over 20% year-to-date and could be due for a revert to previous price levels. On the other hand, ETP has gained 6% in 2010 and has outperformed the S&P 500, which has practically failed to gain any upward or downward momentum. Oppenheimer recently initiated coverage of the stock, placing a "perform" rating. First Energy offers investors a 5.9 dividend yield, while Energy Transfer Partners yields 7.5%.

Investors who wish to gain exposure to the energy sector should consider Canada's high dividend paying energy trusts. Pengrowth Energy Trust (NYSE:PGH) offers an impressive dividend yield of 7.7%, while Provident Energy Trust (NYSE:PVX) yields 11.1% respectively. Penn West Energy Trust (NYSE:PWE), another major player in Alberta's oil sands, recently cut its dividend from 15 cents to 9 cents in order to maintain sufficient capital to growth production. While the Alberta energy trusts will undergo changes to their taxation policies in the near future, investors can capitalize either on increased energy prices or simply collecting sizable dividends.

Diversified Dividends
In addition to First Energy and Energy Transfer Partners, two other four-star high-yielding stocks are found in the healthcare and media industries. Eli Lilly (NYSE:LLY), a manufacturer of pharmaceutical products, yields 5.5%, while Regal Entertainment (NYSE:RGC), a North American movie operator, yields 5.9%. Some analysts have suggested that Regal's dividend policy is unsustainable because it is too high, based on the level of corporate earnings. However, the movie theater industry is extremely elastic; as the worst of the recession is left behind, Regal's EPS figures should improve. Analysts are expecting 2011 earnings to grow by 57% in over 2010 levels.

The Bottom Line
While investors should take the opinions of analysts with a grain of salt, those shares that are admired by the investment community are a good place to formulate one's own research. Those offering a high dividend yield are definitely worth consideration.

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Stock Analysis

    5 Cheap Dividend Stocks for a Bear Market

    Here are five stocks that pay safe dividends and should be at least somewhat resilient to a bear market.
  2. Investing

    How to Win More by Losing Less in Today’s Markets

    The further you fall, the harder it is to climb back up. It’s a universal truth that is painfully apparent in the investing world.
  3. Fundamental Analysis

    Use Options Data To Predict Stock Market Direction

    Options market trading data can provide important insights about the direction of stocks and the overall market. Here’s how to track it.
  4. Stock Analysis

    2 Oil Stocks to Buy Right Now (PSX,TSO)

    Can these two oil stocks buck the trend?
  5. Investing News

    What Alcoa’s (AA) Breakup Means for Investors

    Alcoa plans to split into two companies. Is this a bullish catalyst for investors?
  6. Stock Analysis

    Top 3 Stocks for the Coming Holiday Season

    If you want to buck the bear market trend by going long on consumer stocks, these three might be your best bets.
  7. Investing News

    Could a Rate Hike Send Stocks Higher?

    A rate hike would certainly alter the investment scene, but would it be for the better or worse?
  8. Investing News

    Corporate Bonds or Stocks: Which is Better Now?

    With market volatility high, you may think it is time to run for corporate bonds instead of stocks. Before you do take a deeper look into which is better.
  9. Mutual Funds & ETFs

    Using Short ETFs to Battle a Down Market

    Instead of selling your stocks to get gains, consider a short selling strategy, specifically one that uses short ETFs that help manage the risk.
  10. Investing Basics

    How to Diversify with International Stocks

    Diversifying with international stocks can benefit most portfolios, but beware of country risk.
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!