3 Dividend Stocks To Consider

Michael is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Editor's Note: The original article referenced a 10% yield for FTE. Upon further inspection, the company is shooting for an $0.80 payout. The dividend yield and price have been updated.

With the current uncertainty in the market, having a solid list of dividend stocks in your portfolio is a must. Not only do they provide a constant stream of income, they also are generally solid businesses with low volatility. In a time of a market rally, their share prices appreciate and also provide dividends. In a time of a market selloff, their share prices will go down but typically less than the market in percentage terms, and they still provide the dividend.

To find the best dividend stocks, I scanned for the following:

52 Week Price Percentiles between 0 and 20

Buying high paying dividend stocks at low prices increases the dividend yield. Additionally, stocks at their lows have the highest potential for price appreciation. This is especially true for high paying dividend stocks as they tend to be stable, high revenue generating businesses.

Average Volume Greater than 400,000

It is important to make investments in liquid stocks. High volume ensures that you can enter and exit your position easily, and you won't have to cross a wide bid/ask spread.

Price Greater than $10.00

Stocks that trade below $10.00 tend to not have as much volume and have a higher risk for cutting their dividend. That is the last thing you want when specifically targeting high paying dividend stocks.

This scan generated a list of about 100 stocks. I then sorted them by dividend yield and arrived at my list of 3.

Results

It is important to note that while each of the stocks below has an impressive dividend yield, each stock has their respective challenges and business problems that should be taken into consideration.

(1) Annaly Capital Management (NYSE: NLY)

Annaly has a dividend yield of 13.90%. With a depressed stock price of $14.39 compared to a 52 week high of $17.24, it offers a high chance to capture both price appreciation and a strong dividend payment.

Annaly Capital has a Forward PE Ratio of 9.81, which ranks it in the top third of its industry. Additionally, the company has a return on equity of 8.97% which ranks it in the top 25% of its industry.

A potential concern is that Annaly is in the REIT space which could suffer if the U.S. economy falls over the fiscal cliff. The industry has also been hit hard from declining interest rates which continue to drag down the Mortgage REIT Industry. Another concern is Annaly's exposure to mortgage backed securities. As we saw in 2008, these are extremely complex and hard to understand securities. Should the U.S. economy begin to falter, Annaly could falter as well, and a dividend cut could be in store.

(2) Pitney Bowes (NYSE: PBI)

Pitney Bowes has a dividend yield of 13.60%. With a depressed stock price of $10.89 compared to a 52 week high of $17.72, it has the potential for a nice value play.

Pitney Bowes has a Forward PE Ratio of 5.81, which ranks it in the top 40% of its industry. In its most recent earnings report, PBI had an operating income increase of 7.5%, year over year.

My one worry with Pitney Bowes is that its in the business equipment industry. If there is any downturn in the economy or if small businesses are forced to pay higher corporate tax rates in 2013, this industry could really take a hard hit. As such, take caution with this name. Additionally, the sales numbers were not very impressive in its most recent earnings report. For the third quarter 2012, sales decreased by 6.5 from the same quarter in 2011. Also, year over year sales had decreased by 5.6%. There were also declines in revenues across many of PBI's business divisions.

Although these numbers sound negative, I have reason to believe things will turn around in light of the hiring of IBM's Marc Lautenbach as CEO. And coupled with the impressive dividend ratio, I believe the good outweighs the bad.

(3) France Telecom (NYSE: ORAN)

France Telecom has a dividend yield of 6.9%. With a depressed stock price of $11.46 compared to a 52 week high of $15.13, the stock offers a high chance to capture both price appreciation and a strong dividend payment.

France Telecom has a Forward PE Ratio of 6.31, much lower than that of its peers in the foreign telecom industry. France Telecom also has a very respectable return on equity of 12.30%.

Some potential risks for France Telecom would be competition from Siemens AG, a large player in the space, and Lliad S.A., a new lost cost competitor. Additionally, Europe is facing difficulties from a macro perspective which could have trickle down effects to individual companies such as France Telecom.

France Telecom also recently cut their dividend. This was mostly due to a disappointing earnings report during their most recent quarter. The company saw a drop in both revenues and earnings across their business divisions. With an economic slump, fierce competition, and signs of declining revenues, there are reasons to be concerned.

Still I believe that the region will turn around, and France Telecom will continue to benefit from expansion across the globe. Throw in the appealing dividend yield, and there are reasons to be optimistic.

Conclusion

Dividend stocks are a crucial part of anyone's portfolio. Some say that they should be avoided because there is usually a reason why the company is making such a high cash payment. I think that fear is why many of these great businesses are trading so low relative to their 52 week highs. If you are making an investment for the long-term and are looking for quality high paying dividend stocks, consider the 3 stocks listed above. But understand that in exchange for the attractive dividend yields come some potential risks.


Fool blogger Michael Meyer does not own shares in any of the companies mentioned in this entry.  The Motley Fool recommends France Telecom (ADR). The Motley Fool owns shares of Annaly Capital Management, Inc. and France Telecom (ADR). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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