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I have searched for very profitable companies that pay very rich dividends and that raise their payouts by more than 20% each year. I have elaborated a screening method, which shows stock candidates following these lines. Nonetheless, the screening method should only serve as a basis for further research.

The screen's formula requires all stocks to comply with all following demands:

  1. The stock is included in the Russell 3000 index. Russell Investment explanation:

The Russell 3000 Index measures the performance of the largest 3000 U.S. companies representing approximately 98% of the investable U.S. equity market. The Russell 3000 Index is constructed to provide a comprehensive, unbiased, and stable barometer of the broad market and is completely reconstituted annually to ensure new and growing equities are reflected.

  1. Trailing P/E is less than 14.

  2. Forward P/E is less than 13.

  3. Average annual earnings growth estimates for the next 5 years is greater than 5%.

  4. Price to free cash flow is positive.

  5. Dividend yield is greater than 4.0%.

  6. Annual rate of dividend growth over the past five years is greater than 22%.

  7. The payout ratio is less than 65%.

After running this screen on January 05, 2013, the following three stocks came out:

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Darden Restaurants, Inc. (NYSE:DRI)

Darden Restaurants, Inc. owns and operates full service restaurants in the United States and Canada.

Darden Restaurants has a low trailing P/E of 13.24 and an even lower forward P/E of 12.32; the PEG ratio is at 1.20. The average annual earnings growth estimates for the next five years is quite high at 11.02%. The forward annual dividend yield is very high at 4.50% and the annual rate of dividend growth over the past five years was very high at 24% and the payout ratio is at 53%.

On December 20, 2012, Darden Restaurants reported its 2Q fiscal 2012 financial results (here), which was in-line on EPS and beat expectations on revenue. In the report, Darden affirmed its financial outlook for fiscal 2013:

The Company anticipates total sales growth of between +7.5% and +8.5% for the year based upon combined U.S. same-restaurant sales of approximately -1.0% to flat for Red Lobster, Olive Garden and LongHorn Steakhouse, incremental sales starting in fiscal September from the acquisition of Yard House and the opening of approximately 100 net new restaurants in fiscal 2013, not including the initial 40 Yard House restaurants operating at the close of the acquisition. And, the Company expects diluted net earnings per share from continuing operations of $3.29 to $3.49 for fiscal 2013, which includes approximately 8 to 10 cents of transaction and closing costs associated with the purchase of Yard House USA, Inc.

The cheap valuation, the solid growth prospects and the rich dividend are all factors that make DRI stock quite attractive.

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Data: Yahoo Finance Chart: Arie Goren

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Chart: finviz.com

Strayer Education Inc. (NASDAQ:STRA)

Strayer Education, Inc., through its subsidiary, Strayer University, provides post-secondary education services for working adults.

Strayer Education has a very low trailing P/E of 9.22 and a very low forward P/E of 11.96; the PEG ratio is at 1.66. The average annual earnings growth estimates for the next five years is at 5.57%. The forward annual dividend yield is very high at 7.0% and the annual rate of dividend growth over the past five years was very high at 23% and the payout ratio is at 61%. On November 11, 2012, Wargo J David, director of Strayer Education, purchased 60,000 STRA shares at $45.91 a share at a total value of $2,754,600 (here).

All these factors -- the low multiples, the fact that a company director is buying STRA shares and the very rich dividend -- make STRA stock quite attractive.

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Data: Yahoo Finance Chart: Arie Goren

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Chart: finviz.com

Tower Group Inc. (NASDAQ:TWGP)

Tower Group, Inc., through its subsidiaries, provides commercial, specialty, and personal property and casualty insurance products and services to businesses in various industries and to individuals in the United States.

Tower Group has a very low debt (total debt to equity is only 0.43) and it has a low trailing P/E of 13.49 and a very low forward P/E of 6.77; the PEG ratio is also very low at 0.75. The average annual earnings growth estimates for the next 5 years is quite high at 18%. The forward annual dividend yield is quite high at 4.10% and the annual rate of dividend growth over the past five years was very high at 32.3% and the payout ratio is at 56%. The company is trading 18.84% below its 52-week high and has 21% upside potential based on the consensus mean target price of $22.50. On December 07, 2012, Tower Group announced (here) that it now expects the consummation of its previously announced merger with Canopius Holdings Bermuda Limited to occur in the first quarter of 2013. Tower's preliminary proxy materials continue to be under review by the Securities and Exchange Commission and, accordingly, the approval of the merger by Tower stockholders will not occur in 2012. In addition to the approval of Tower's stockholders, the merger remains subject to obtaining the regulatory approval of governmental and market authorities.

The very low multiples, the strong growth prospects, the rich dividend and the fact that TWGP stock is selling way below book value (price to book value ratio is only 0.68) make TWGP stock quite attractive.

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Data: Yahoo Finance Chart: Arie Goren

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Chart: finviz.com

Source: 3 High-Yielding Dividend Stocks That Hike Dividends By More Than 20% Each Year