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See Part 1 here.

In a previous article, we provided a list of 31 stocks from David Fish’s Dividend Challengers in the S&P 500 and showed how they have beaten the SPY since the beginning of the year. Fish compiles a complete list of all US stocks that have increased their dividend payout for at least 25 consecutive years, naming them as Dividend Champions. Dividend Challengers is a separate sub-list of US stocks that have increased their dividend payouts for five to nine years and are nominees for future Dividend Champions. These lists can be found here.

We believe investors should be cautious of the upcoming inflationary environment and pick defensive stocks in near future. We think the Dividend Challengers in the S&P 500 that are able to increase dividends may provide inflation protection with sustainable returns and a better risk-return combination.

Below we provided the remaining stocks from Fish’s Dividend Challengers in the S&P 500 and showed how they have performed this year (the market data are sourced from Fidelity):

Dividend Yield

Dividend Payout Ratio 2010

YTD Return

Reynolds American Inc.

RAI

5.32%

80%

17.61%

Verizon Communications

VZ

5.23%

87%

7.32%

PPL Corp.

PPL

5.04%

45%

8.70%

Southern Company

SO

4.58%

78%

8.07%

PG&E Corporation

PCG

4.32%

53%

-9.40%

Public Service Enterprise Group

PEG

4.27%

44%

2.89%

Xcel Energy Inc.

XEL

4.21%

63%

5.08%

Waste Management Inc.

WM

3.53%

62%

0.88%

Sempra Energy

SRE

3.34%

48%

0.99%

Raytheon Co.

RTN

3.25%

32%

4.45%

Wisconsin Energy Corp.

WEC

2.95%

48%

8.40%

Northrop Grumman Corp.

NOC

2.84%

28%

14.83%

ONEOK Inc.

OKE

2.67%

64%

35.23%

Republic Services Inc.

RSG

2.60%

47%

2.10%

Travelers Companies

TRV

2.56%

24%

6.31%

Staples Inc.

SPLS

2.49%

30%

-31.19%

Safeway Inc.

SWY

2.17%

33%

6.43%

Robert Half International

RHI

2.08%

123%

-14.88%

Norfolk Southern Corp.

NSC

2.04%

38%

20.18%

Williams Cos Inc.

WMB

2.01%

45%

17.75%

Xilinx Inc.

XLNX

1.88%

28%

18.23%

Ryder System Inc.

R

1.88%

49%

9.06%

Yum! Brands Inc.

YUM

1.75%

38%

14.98%

Occidental Petroleum

OXY

1.65%

29%

5.91%

National Semiconductor

NSM

1.62%

32%

81.11%

Texas Instruments Inc.

TXN

1.57%

19%

-3.91%

Union Pacific Corp.

UNP

1.53%

28%

11.21%

QUALCOMM Inc.

QCOM

1.35%

32%

14.14%

NIKE Inc.

NKE

1.31%

27%

8.55%

Tiffany & Co.

TIF

1.29%

35%

32.92%

Pall Corp.

PLL

1.20%

32%

13.01%

Torchmark Corp.

TMK

1.03%

10%

5.62%

AVERAGE

2.67%

45%

10.08%

SPY

4.78%

Since the beginning of this year, the average YTD return of these 32 stocks was 10.08% vs. 4.78% for the SPY. All these stocks except four – RAI, VZ, SO and RHI – have a dividend payout ratio of less than 75%. The average dividend pay-out ratio of those stocks is 45% and the average dividend yield is 2.67%.

Here are the 10 highest dividend yielding stocks in our list:

Reynolds American Inc. is a large U.S. tobacco company operating worldwide. RAI has a 5.32% dividend yield and returned 17.61% since the beginning of this year. The stock has a market cap of $27.72B and a P/E ratio of 15.75. Jim Simons, David Winters and Cliff Asness are prominent RAI investors.

Verizon Communications is a large telecommunications company operating worldwide. VZ has a 5.23% dividend yield and gained 7.32% since the beginning of this year. The stock has a market cap of $104.51B and a P/E ratio of 29.09. Phil Gross' Adage Capital holds nearly $150 Million of VZ.

PPL Corp. is an energy company that delivers electricity and natural gas in the United States and the United Kingdom. PPL has a 5.04% dividend yield and gained 8.70% since the beginning of this year. The stock has a market cap of $16.09B and a P/E ratio of 11.96. Richard Schimel's Diamondback Capital has the largest PPL position among 300-plus funds we are tracking. Gross and Steven Cohen are also among PPL investors.

Southern Company is a utility company providing electricity in the United States. SO has a 4.58% dividend yield and returned 8.07% since the beginning of this year. The stock has a market cap of $34.24B and a P/E ratio of 17.92 Gross’ Adage Capital and Clint Carlson’s Carlson Capital are prominent SO investors.

PG&E Corporation is a US utilities company providing electricity and natural gas mainly in California. PCG has a 4.32% dividend yield but lost 9.40% since the beginning of this year. The stock has a market cap of $16.89B and a P/E ratio of 16.01. Gross’ Adage Capital has the largest PPL position among 300-plus funds we are tracking. Simons is also a prominent PCG investor.

Public Service Enterprise Group is another utilities company providing electricity and natural gas primarily in the northeastern an mid-Atlantic United States. PEG has a 4.27% dividend yield and gained 2.89% since the beginning of this year. The stock has a market cap of $16.26B and a P/E ratio of 10.67. Israel Englander and Gross are among PEG investors.

Xcel Energy Inc. is a public utility company that provides electricity and natural gas delivery services in the United States. XEL has a 4.21% dividend yield and returned 5.08% since the beginning of this year. The stock has a market cap of $11.73B and a P/E ratio of 14.50. Lois Bacon’s Moore Global Investments holds the largest XEL position among 300-plus funds we are tracking.

Waste Management Inc. is a US company providing waste management and comprehensive waste removal services. WM has a 3.53% dividend yield and returned 0.88% since the beginning of this year. The stock has a market cap of $17.33B and a P/E ratio of 18.27. Boykin Curry's Eagle Capital had more than $200 Million in WM at the end of March 2011.

Sempra Energy is a US energy holding company that provides energy-related products and services worldwide. SRE has a 3.34% dividend yield and gained 0.99% since the beginning of this year. The stock has a market cap of $12.59B and a P/E ratio of 14.35. Gross’ Adage Capital holds more than $80 Million of SRE.

Raytheon Co. is a US defence contractor and military equipment manufacturer operating worldwide. RTN has a 3.25% dividend yield and returned 4.45% since the beginning of this year. The stock has a market cap of $16.81B and a P/E ratio of 10.04. Alex Roepers' Atlantic Investment has the largest RTN position among the funds we are tracking, holding more than $100M of the stock. Ric Dillon, Steven Richman and Asness are also among RTN investors.

Source: Investing in S&P 500 Dividend Challengers: Part 2