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By Serkan Unal

Martin J. Whitman is a well-known value investor with over 50 years of success in finding undervalued equities with strong balance sheets. He founded his investment firm, Third Avenue Management, in 1990, and served as a lead portfolio manager of the firm's flagship fund, the Third Avenue Value Fund, until March 1, 2012. Whitman currently serves as a Chairman and Portfolio Manager of the $11 billion investment firm which prospects for "safe" stocks boasting solid finances, seasoned management, and attractive growth potential. His picks generally sell at discounts to their intrinsic values.

Whitman's investment firm recently released its 13-F regulatory disclosure for the fourth quarter of 2012. Based on the filing, Whitman's holds large positions in several banks. His largest positions are The Bank of New York Mellon Corporation (NYSE:BK) and Bank of America Corporation (NYSE:BAC). While the latter currently pays a small dividend, the market is generally expecting the capital-rich bank to boost its dividend payout to as much as 12 cents per share annually from 4 cents currently, according to an analyst survey by Bloomberg. Aside from these picks, Third Avenue Management also holds large positions in several dividend-paying picks. Here is a closer look at five undervalued or growth stocks paying dividend yields above 2.0%. These stocks boast upside potential and are ranked according to their position size in the fund's total assets.

KeyCorp (NYSE:KEY), a holding company for KeyBank National Association, has a dividend yield of 2.1% and a payout ratio of 24% of the current-year EPS estimate. Its dividend was slashed in both 2008 and 2009, but since it has recovered. This year alone, the dividend was hiked by 67%. Given the bank's financial results and a low payout ratio, continued dividend increases are likely. The bank has seen a 21% growth in commercial and industrial loans over the past year. Its total loan growth has increased 7%. The bank's funding costs have been improving, with total deposit cost declining to 31 basis points in the previous quarter from 75 basis points in the first quarter of 2011. KeyCorp has also seen strong non-interest income, which increased last quarter by 12.6% year-over-year. The bank is targeting savings of up to $200 million by December 2013 and is buying back shares, which is buttressing its EPS growth. KeyCorp has a ROE of 8.5%, about on par with the overall banking industry. The bank's shares are trading at a 10% discount to book value. Last quarter, Third Avenue Management reported owning more than 20.6 million shares of KEY, a 16% increase from the earlier quarter.

Weyerhaeuser Co. (NYSE:WY), a forest products REIT, has a dividend yield of 2.2% and a payout ratio for 2012 exceeding the targeted 75% of the Funds Available for Distribution (NYSEARCA:FAD). The company's dividend was sharply reduced in 2009; however it has risen by 240% from the quarterly low payout of 5 cents per share to the current 17 cents per share. In terms of growth, Weyerhaeuser Co. is greatly leveraged to the housing market, as a lion's share of its business operations is linked to the housing market. The company is well-positioned to benefit from the housing upturn as timber supplies from Western Canada weaken and demand and selling prices for domestic and export logs improve. The company anticipates a 30% increase in U.S. housing starts this year, which bodes well for its sales. The REIT realized a 14.5% increase in sales last year. Its operating cash flow doubled to $581 million. According to a Citi analyst, as reported in an article by Barron's in August 2012, this REIT could raise its dividend 50% by 2014. The analyst called the Weyerhaeuser Co.'s potential to raise dividends "unmatched in the sector." In January 2013, Citi upheld its buy rating on the stock and raised its target price to $36, based on higher estimates of pulp production and a more bullish lumber production outlook. The stock is trading at EV/EBITDA of 17.1x versus 19.5x for rival Plum Creek Timber Company, Inc. (NYSE:PCL). Last quarter, Third Avenue Management reported owning more than 5.8 million shares of WY, about 1% below the share count in the quarter earlier.

Covanta Holding Corporation (NYSE:CVA), a company providing waste management and energy services to North America's municipalities, has a dividend yield of 3.1% and a payout ratio of 130% of its current-year EPS estimate but only 37% of free cash flow. Last quarter, the company beat on the top line, driven by organic growth in special waste and recycled metals, as well as by contract escalations. The company's full-year revenue was in line with estimates. However, high interest expenses, adverse effects of the Hurricane Sandy, and rising taxes caused the company to miss analysts' expectations on the bottom line. Covanta Holding sees adjusted 2013 EPS between $0.40 and $0.50, compared with $0.46 per share expected by analysts. The company estimates 2013 free cash flow between $250 million and $280 million, with the midpoint of $265 million slightly higher than last year's $262 million. Covanta Holdings is well-positioned for growth amid anticipated increases in waste supply driven by rising populations and economic growth. Moreover, improvements in market energy and metals pricing as well as "green-field" development projects support growth in the longer run. Its long-term EPS CAGR is forecasted at a robust 15.4%. However, the stock's valuation is high, with a forward P/E of 42.7x versus 24.2x for the alternative electricity industry. Last quarter, Third Avenue Management reported holding nearly 7.9 million CVA shares, unchanged from the quarter earlier.

Applied Materials Inc. (NASDAQ:AMAT), the world's largest semiconductor equipment supplier, has a dividend yield of 2.6%, payout ratio of 60% of the current-year EPS estimate, and five-year annualized dividend growth of 8.9%. The company was mired in a major sales slump amidst a global wafer fabricated equipment (WFE) spending plunge of 17.4% in 2012 alone. Extended declines in WFE spending are forecasted for 2013, with spending expected to drop another 9.7%. Growth is expected to resume in 2014. Still, AMAT has seen positive EPS estimate revisions over the past three months. The company's October 2013 and October 2014 EPS have been revised upward by 11.1% and 21.8%, respectively, over the past three months. Some of the current growth momentum is driven by expanding production due to a strong demand for mobile devices. The company is generally viewed as being close to the cyclical trough. AMAT is currently trading at 17.8x forward earnings, compared to 23.5x for the semiconductor industry. The stock's price-to-book of 2.3 is below an industry average ratio of 2.5. Last quarter, Third Avenue Management reported owning 9.85 million AMAT shares, 5% higher than in the third quarter of 2012.

Comerica Incorporated (NYSE:CMA), a financial services company operating in Texas, Arizona, California, Florida, and Michigan, has a dividend yield of 2.0% and a payout ratio of 25% of the current-year EPS estimate. The company's dividend was cut both in 2008 and 2009, but it has recovered from the low quarterly payout of 5 cents per share quarterly to the current 15 cents per share quarterly. Comerica's profits are improving, as analysts keep revising upward the company's EPS estimates. Over the past three months, Comerica's December 2013 and December 2014 EPS estimates have been lifted by 4.9% and 0.7%, respectively. Still, the company has low ROE of 7.5%, below the banking industry's average ROE of 8.3%. Stifel Nicolaus recently downgraded CMA to sell based on high valuation, low ROA relative to those of its peers, and the market's exaggerating of the potential benefit from the recent rise in long-term interest rates. However, the bank is still undervalued based on a 10% discount to book value and historical metrics (the 10-year average price-to-book is 1.3). Last quarter, Third Avenue Management hiked its stake in CMA by 177% from the third quarter of 2012 to 2.5 million shares.

Source: 5 Dividend-Paying Picks From A Renowned Value Investor's Fund