Written by Alexander Crawford



It appears that the age of company cash hoarding is behind us - Standard & Poor's is predicting that the S&P 500 index will pay a record total dollar amount of dividends this year, beating the current record of $247.9 billion in 2008.

This could be a result of improved economic outlooks on the part of company management, or it could be from the belief that investors now prefer dividend-yielding names, or both.

"I think there's a change in investor appetite for risk, and that in the last couple of years that has resulted in better performance for dividend-paying stocks," said Gina Martin Adams, Wells Fargo institutional equities strategist. (via CNBC)

According to Adams, companies are just beginning to catch on to the fact that investors are seeking dividend-paying stocks and will reward them.

Interactive Chart: Press Play to compare changes in market cap over the last two years for the stocks mentioned below.



Business Section: Investing Ideas
To give some ideas on how to look for dividend stocks, we ran a screen on stocks paying dividend yields above 2% and sustainable payout ratios below 50%. We screened these stocks for those with low levels of debt, which is considered a sign of a strong dividend.

We then found those companies that have high profitability, with higher gross, operating and pretax margins. Finally, we screened for those that appear undervalued, with high ratios of levered free cash flow/enterprise value.

Do you think these companies will be increasing their dividends this year? (Click here to access free, interactive tools to analyze these ideas.)

1. HCC Insurance Holdings Inc. (NYSE: HCC): Provides property and casualty, surety, group life, accident, and health insurance coverage, as well as related agency and reinsurance brokerage services to commercial customers and individuals worldwide. Dividend yield at 2.10%, payout ratio at 24.34%. Total debt/equity at 0.15. TTM gross margin at 17.87% vs. industry average at 12.66%. TTM operating margin at 17.11% vs. industry average at 10.01%. TTM pretax margin at 16.17% vs. industry average at 9.02%. Levered free cash flow at $661.50M vs. enterprise value at $3.34B (implies a LFCF/EV ratio at 19.81%).

2. KLA-Tencor Corporation (Nasdaq: KLAC): Engages in the design, manufacture, and marketing of process control and yield management solutions for the semiconductor and related nanoelectronics industries. Dividend yield at 2.85%, payout ratio at 26.45%. Total debt/equity at 0.25. TTM gross margin at 61.96% vs. industry average at 59.35%. TTM operating margin at 34.28% vs. industry average at 23.4%. TTM pretax margin at 32.53% vs. industry average at 22.57%. Levered free cash flow at $702.17M vs. enterprise value at $6.81B (implies a LFCF/EV ratio at 10.31%).

3. USA Mobility, Inc. (Nasdaq: USMO): Provides wireless communications solutions to the healthcare, government, enterprise, and emergency response sectors in the United States. Dividend yield at 6.71%, payout ratio at 40.33%. Total debt/equity at 0.12. TTM gross margin at 66.92% vs. industry average at 60.66%. TTM operating margin at 28.7% vs. industry average at 21.41%. TTM pretax margin at 26.51% vs. industry average at 16.64%. Levered free cash flow at $51.33M vs. enterprise value at $313.28M (implies a LFCF/EV ratio at 16.38%).

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

Alexander Crawford does not own any of shares of the companies mentioned above. Profitability data sourced from Yahoo! Finance.

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