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Enticing Dividend-Paying Stock Picks

Kathy Kristof, Contributing Editor, <i>Kiplinger's Personal Finance</i>

Angling for more yield from your portfolio? Who isn't in this low-rate environment? Sure, there's risk with stocks in a volatile market, but even if share prices bounce around, the income from dividend-paying stocks is fairly secure.

You don't always need to turn to giants such as AT&T and Altria to earn a decent, reliable yield. Two places to consider beyond these old standbys are first-time dividend payers and small companies. We've identified nine stocks worth watching.

Let's start with first-time dividend payers. Initiating a dividend can mean that a company is going gangbusters and is generating so much extra cash that it makes sense to toss some back to shareholders. But, says Hugh Johnson, an Albany, N.Y., money manager, a dividend launch is not always good news. It could mean that growth has slowed and management has no better idea of what to do with the money than pay it out. Naturally, we selected first-time dividend payersthat are likely to keep hitting it out of the park.

Turning to small companies paying big dividends, these picks can benefit from being too tiny to lure the whale-sized institutions that dominate Wall Street. And that can spell opportunity for individual investors, who aren't buying shares in multimillion-dollar blocks.

*All stock prices and related numbers are as of market close on June 25.


52 week high: $705.07

52 week low: $385.10

Price-earnings ratio: 8

Yield: 3.0%

The iconic tech giant was flying high until last fall, when investors began to fret about intensifying competition in smart phones. The stock really hit the skids in January, when Apple (symbol AAPL) reported flat earnings for the October-December quarter. The stock, which peaked at $702 in September, now goes for $402.63.

But many pros think the swoon has gone too far. Trefis, a Boston firm that analyzes the value of companies on a piece-by-piece basis, thinks Apple stock is worth $626. The company has $137 billion in cash and securities ($146 per share) on its balance sheet.

Last year, Apple announced that it would return $45 billion in cash to shareholders through dividends and stock buybacks over three years. Just $10 billion had been returned to shareholders as of mid February. But during the October-December quarter, the Cupertino, Cal., company generated another $23 billion of excess cash, prompting some big shareholders to press Apple to give back more.

KAR Auction Services

52 week high: $24.37

52 week low: $14.10

Price-earnings ratio: 19

Yield: 3.4%

A dearth of new-car sales over the past few years hurt KAR Auction Services (KAR), the Carmel, Ind., parent of Adesa. But the auto-auction business appears to be revving up as consumers return to dealerships, rental-car firms update their fleets, and leases generated over the past three years expire. Barrington Research analyst Gary Prestopino expects KAR to start rolling in 2014, with high-single-digit sales growth and double-digit earnings gains.

KAR is a star when it comes to generating the excess cash flow that makes dividend payments to shareholders possible. In 2012, the company threw off $237 million more cash than it needed to maintain the business, and it expects to produce more than $260 million in excess cash in 2013. KAR's dividend payments cost about $104 million annually. The company started paying dividends in December at a quarterly rate of 19 cents per share.


52 week high: $15.60

52 week low: $10.69

Price-earnings ratio: 12

Yield: 3.7%

There's good news and bad news at SAIC Inc. (SAI). The bad news is that the cyber-security company's biggest customer, the U.S. Department of Defense, is cutting back, and no one is sure how badly that might wound any government contractor. The good news is that President Obama specifically mentioned the need for greater cyber security in his State of the Union address, which may mean that SAIC will suffer less than other defense contractors. The McLean, Va., company has also announced plans to split in two, with one piece focusing on the slow-growing government-contracting business and the other concentrating on providing cyber-security services to private industry, a faster-growing business.

James Friedman, an analyst with Susquehanna Financial Group, is cautiously optimistic about the divided company's prospects, but he isn't recommending the stock until he sees details on how assets and debts will be divvied up. He says the two pieces are worth $13 a share combined, a buck above the stock's recent price. SAIC initiated a quarterly dividend of 12 cents per share a year ago, so even if you don't get much appreciation, you get a generous yield.

Warner Chilcott

52 week high: $20.75

52 week low: $10.85

Price-earnings ratio: 6

Yield: 2.6%

Warner Chilcott (WCRX) is a deeply discounted drug maker with turnaround potential, says analyst Randall Stanicky, of Canaccord Genuity. At $13, the stock sells for a paltry 4 times estimated 2013 earnings, mainly because investors are concerned that sales of generic drugs will eat away at Warner's profits. Generics are already nipping at its business. Sales dropped 5% in the fourth quarter, largely because the Ireland-based company lost patent protection in Europe and Canada for an osteoporosis treatment.

As with other drug makers, Warner's profits will largely hinge on how well it's able to introduce new drugs and protect its business when other patents expire over the next decade. Without an acquisition to expand the company's drug portfolio, earnings are likely to decline, says Stanicky. The right deal, he says, could turn Warner into a growth company, though when that might happen is anyone's guess.

To keep shareholders happy in the meantime, Warner started paying a 25-cent-per-share semi­annual dividend in December. Thanks to that dividend, which accounts for less than 15% of the excess cash Warner generates yearly, investors are being paid to wait until the company's growth prospects improve.

MTS Systems

52 week high: $62.91

52 week low: $37.27

Price-earnings ratio: 18

Yield: 2.1%

Working with makers of everything from windmills to snowmobiles, MTS Systems (MTSC) helps its customers test prototypes of new products for reliability, stability and durability. The 47-year-old Eden Prairie, Minn., engineering company generates only about one-third of its revenues in the U.S.; nearly 40% of its sales come from fast-growing manu­facturing centers in Asia. Although the global economy is improving, growth is likely to remain restrained for some time. That's good news for MTS, says Sidoti & Co. analyst John Franzreb. When competition is fierce, businesses feel pressured to develop more new products. To get these products to market quickly, they rely on the testing expertise of companies such as MTS.

MTS has a strong balance sheet, with virtually no outstanding debt and cash reserves of nearly $80 million, or 10% of the stock's market value. The current annual dividend rate of $1.20 per share has tripled since 2006.

Electro Rent

52 week high: $18.73

52 week low: