4 U.S. Dividend All-Star Stocks

Janet Yellen's March 18 statement finally removed the word "patient" in respect to the Federal Reserve's timing of any future interest rate increases. For many market watchers, this signaled the likely start of a cycle of interest-rate tightening, beginning as soon as June 2015.

Of course, Yellen's statement was largely anticipated by the market. Interest-rate sensitive stocks, such as utilities and real estate investment trusts, have been declining in price since the start of the year. Stocks paying significant dividends are sensitive to rising interest rates, due to the relative attractiveness of their yields compared to interest-paying investments.

Now that the expected news of pending interest rate hikes has been confirmed, many of these strong dividend-paying stocks have already sold off and may now find themselves nicely valued for an environment of slowly increasing interest rates.

The screen. We will be using Recognia Strategy Builder to search for U.S. stocks with strong, sustainable dividend yields. We begin by setting a minimum market capitalization threshold of $10 billion to focus on larger, more stable and established companies in the market. Next, we will look for companies with a dividend yield of at least 2.5 percent. This narrows the field to approximately 200 U.S.-listed stocks. Note that we are only considering common shares in our screen.

In order to select companies with the financial capacity to continue their dividend payments in the future, we will specify a dividend-coverage ratio of at least 150 percent. The dividend coverage ratio is found by taking the company's earnings per share for the past 12 months and dividing by the dividends paid over the past year. A high dividend-coverage ratio indicates a company has the earnings to continue paying out the dividend, and perhaps even raise it in the future.

Finally, in order to ensure we don't overpay for our investment, we will look for companies that are well-valued, by selecting only stocks with trailing price-earnings ratios of less than 18. Last, we will select only companies that have sold off over the past 13 weeks by between 5 percent and 25 percent.

What did we find?

Marathon Oil Corporation. Like many energy stocks, this stock has had a tough time recently, down 32 percent since the start of October. However, the stock pays a handsome dividend of 3.2 percent and has a very high-dividend coverage ratio of 471 percent. Of course, a prolonged period of low oil prices will hurt Marathon's earnings generation capability, so the coverage ratio is almost certain to drop. However, the company is less likely to require a cut to the dividend with the coverage ratio so high today.

Weyerhaeuser. This forestry giant also makes our list with an extremely low P/E ratio of 10.1 and a 3.4 percent dividend yield. The stock is down approximately 5.8 percent in the past 13 weeks, mainly since the start of February. On Jan. 30, the company announced fourth-quarter results, which missed analyst expectations slightly on both earnings and revenue.

Seagate Technology. The storagemaker is another interesting dividend play. Seagate's fortunes are closely tied to the PC market, which has been in a downtrend for a number of months. Seagate pays a very attractive dividend of 3.9 percent and has a 222 percent dividend coverage ratio. Seagate is down a whopping 18.6 percent in the past quarter, due mainly to signs of weakening PC demand. On March 10, Needham & Company upgraded Seagate to a strong buy with a $65 price target.

Microsoft Corporation. It's the largest company on our list with a market capitalization of $351 billion. Microsoft currently pays a 2.9 percent dividend and has a strong track record of dividend increases over the past 10 years. The company currently has a trailing P/E ratio of 17.0, which is toward the low end of its historical range, and below the overall Standard & Poor's 500 index P/E ratio of 19.4.

Historical Performance. Recognia Strategy Builder provides a backtesting capability to evaluate how well an investing strategy would have worked in the past. Using a five-year historical period with quarterly rebalancing, the screen described in this article had a 20.2 percent annualized return compared to 12.6 percent for the S&P 500 index and 10.8 percent for the Dow Jones industrial average.

The investment ideas presented here are for information only. They do not constitute advice or a recommendation by Recognia Inc. in respect of the investment in financial instruments. Investors should conduct further research before investing.

Peter Ashton is the vice president of retail and self-directed investing for Recognia, the industry leader in providing global retail investors with actionable insights to make confident trading decisions. Ashton is directly responsible for empowering the trading community of over 20 million investors to which Recognia is provisioned by ensuring all aspects of the company's client service delivery, including the distribution of in-depth investment research culled from Recognia's patented investing analytics.

Peter Ashton of Recognia is a blogger for The Smarter Investor. You can follow him and Recognia on Twitter at @Recognia_Peter and @Recognia.