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Most of us are at least acquainted with the classic Wall Street strategy known as “Dogs of the Dow,” which was first popularized some twenty years ago. The strategy calls for buying shares of the ten highest-yielding companies in the thirty-stock Dow Jones industrial average. A major part of the attraction of the rules based strategy is its simplicity but inherent in the strategy of attempting to discover high-dividend-yielding value stocks that have fallen out of favor are elements of reversion to the mean and dollar-cost averaging.

One major shortcoming of the “Dogs of the Dow” is with only thirty stocks in its universe, it becomes unlikely to produce a diversified portfolio. After giving the matter some thought, we decided it seemed intuitive that the strategy could be improved by applying the same theory to the larger and more representative S&P 500 index. With dividend paying stocks garnering additional interest from all types of investors, we think this could be a particularly good strategy for 2012. To that end we have computed the highest yielding stocks in the S&P 500 as of December 31, 2011 and are profiling the 15 highest yielding companies in a three-part series. Here are the first five companies:

Frontier Communications Corporation (NASDAQ:FTR) is a $5 billion market cap communications company that provides both regulated and unregulated voice, data and video services in 27 states to both retail and wholesale customers. The company has a book value of $4.79. The dividend is $0.75 per year with the latest regular quarterly dividend of $0.1875 being paid December 29, 2011. While the payout ratio is off the charts, the dividend represents 78% of free cash flow and appears stable. The year-end yield was 14.56%.

Windstream Corporation (NASDAQ:WIN) is a $6 billion market cap communications company. Its revenue mix is approximately 61% broadband and business 23% residential and 16% wholesale. The dividend is $1.00 per year with the latest regular quarterly dividend of $0.25 being paid on January 17, 2012. The 2010 payout ratio to free cash flow was 57% and 2011 should end up very similar. The year-end yield was 8.53%.

Pitney Bowes Inc. (NYSE:PBI) is a $4 billion market cap company that provides mail processing equipment and solutions globally. The company’s business is stable if not exciting and sports a PE of only 9 (with earnings estimates at $2.25 per share). The dividend is $1.48 per year with the last quarterly dividend of $0.37 paid December 12, 2011. The year-end yield was 7.98%.

CenturyLink (NYSE:CTL) is a $23 billion market cap company that operates as an integrated communications company. The July 2011 acquisition of Savvis, Inc. added some “sex appeal” and additional growth potential. The stock sells at close to book value and both earnings and dividends are stable. The dividend is $2.90 per year with the latest regular quarterly dividend of $0.725 paid December 16, 2011. The year-end yield was 7.80%.

R.R. Donnelley & Sons Company (NASDAQ:RRD) is a $3 billion market cap company that provides printing, logistics and business process outsourcing worldwide. The company is growing faster than the general print market. Earnings are estimated at $1.84 for 2011 and $1.97 this year. The dividend is $1.04 per year with the latest regular quarterly dividend of $0.26 paid December 1, 2011. The year-end yield was 7.21%.

Continue to Part II >>

Source: Top 15 Dogs Of The S&P 500, Part I