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Many investors are attracted to companies paying monster dividends when looking for stocks that generate income, but as we know the greater the return the greater the risk, and with many of these companies being REITs such as Annaly Capital Management (NYSE:NLY), which pays a dividend with a yield of 14%, it is likely they won't be able to sustain dividend yields as interest rates rise due to economic recovery gaining momentum. Therefore, as the dividend drops so will the stock price. This means that not only will income hungry investors see their income drop but so will the capital value of their investment. When choosing dividend stocks I prefer those companies that can pay a dividend which is roughly twice the risk free rate and higher than inflation, yet have a stable balance sheet with minimal leverage and low price volatility. In this article I have selected five stocks that I believe meet these criteria and represent solid low debt dividend yields that should consistently deliver investor value over 2012 regardless of the economic outcome. As always use my analysis as a starting point for conducting your own due diligence prior to reaching any investment decisions.

Koss Corporation (NASDAQ:KOSS)

Koss designs, manufactures, and sells stereo headphones and related accessories primarily in the United States and Europe. It is currently trading at around $6, which gives it a market cap of $43 million, has a 52 week trading range $4.92 to $7.81 and a price to earnings ratio of 11.

Koss reported a 15% drop in third quarter 2011 earnings to $8.8 million and during the same period reported a massive 84% fall in net income to $281,000. Its balance sheet strengthened during the third quarter 2011 with cash and cash equivalents rising by 45% to $234,000, although long-term debt more than doubled rising by 138% to $3.6 million.

Koss stacks up well against its competitors paying a dividend of 24 cents, which is a yield of 4% and is the second highest in the electronics industry, higher than Sony's (NYSE:SNE) dividend yield of 2% and Panasonic's (PC) dividend yield of 1.5%. Its return on equity of 29% is the highest in the industry and greater than Sony's -12% and Panasonic's -5%.

Koss has an earnings yield of 9.5%, which is more than triple current ten year Treasury bond yields, indicating that the stock is still undervalued at current prices, even when accounting for a risk premium over the risk free rate of return. When this is combined with a conservative debt to equity ratio of 0.23 the company is well positioned to weather any further market volatility and economic headwinds that may arise during 2012, as well as insulating the company from interest rate rises.

However, with a beta 0.03 I wouldn't be expecting the stock to grow substantially in value, although this does bode well for price stability minimizing the risk of capital loss. Overall I believe that despite the company's small size Koss is a solid low debt dividend play that should deliver shareholder value and is currently unfairly valued by the market.

Merck & Company Inc (NYSE:MRK)

Merck provides various health solutions through its prescription medicines, vaccines, biologic therapies, animal health, and consumer care products worldwide. It is one of the world's largest pharmaceutical companies and has a market cap of $119 billion. It has a 52 week trading range of $29.47 to $39 and is now trading at around $38 with a price to earnings ratio of 28.

For the third quarter 2011 Merck reported a 1% drop in earnings to $12 billion and net income dropped by 16% to $1.7 billion. However, Merck reported a stronger balance sheet in this period, with cash and cash equivalents rising by 15% to $14.3 billion, although long-term debt remained roughly steady at around $16 billion.

Merck stacks up well against its competitors as an income generating stock, paying a dividend of $1.68, which is a yield of 4% and is the third highest in the drug manufacturing industry and higher than Pfizer's (NYSE:PFE) dividend yield of 3.7% and Johnson and Johnson's (NYSE:JNJ) dividend yield of 3.5%. Its return on equity of 7% is lower than Pfizer's 13% and Johnson and Johnson's 19%. The company has a conservative debt to equity ratio of 0.32, which bodes well for earnings stability as the company is not overly leveraged and should be able to sustain its dividend payment and weather any further economic headwinds. Merck also has a beta of 0.54, which indicates that the stock price is not particularly volatile.

Merck has a forward price to earnings ratio of 10 and a profit margin of 14%, all of which bode well for further earnings and income growth. Despite having an earnings yield of 4%, which is twice the yield of ten year Treasury bonds, indicating that it is trading at around fair value, I believe that Merck, while dead money in the short-run, is a solid low debt income generating stock that will continue to deliver investor value.

Bristol-Myers Squibb Company (NYSE:BMY)

Bristol-Myers is a global biopharmaceutical company that discovers, develops, and delivers innovative medicines that help patients prevail over serious diseases. It has a market cap of $58 billion. It has a 52 week trading range of $24.97 to $35.44 and is now trading at around $34 with a price to earnings ratio of 17.

For the third quarter 2011 Bristol-Myers reported a 2% drop in earnings to $5 billion and net income rose by 7% to $969 million. However, Bristol-Myers reported a stronger balance sheet in this period, with cash and cash equivalents rising by 22% to $4.5 billion and long-term debt remained rose by 2% to $5 billion.

Bristol-Myers stacks up well against its competitors as an income generating stock, paying a dividend of $1.36, which is a yield of 4% and is the fourth highest in the drug manufacturing industry and higher than Pfizer's (NYSE:PF) dividend yield of 3.7% and Johnson and Johnson's dividend yield of 3.5%. Its return on equity of 21% is higher than Pfizer's 13% and Johnson and Johnson's 19%.

Bristol-Myers has a forward price to earnings ratio of 17 and a profit margin of 18%, all of which bode well for further earnings and income growth. The company also has a very conservative debt to equity ratio of 0.34, which indicates that it has a strong balance sheet that bodes well for earnings and dividend stability, as well as indicating the company is insulated from any interest rate rises that may be on the horizon as the economy improves.

In addition, its earnings yield of 6%, which is twice times current ten year Treasury bond yields, indicates that it is trading at around fair value. For these reasons I believe that at its current trading price Bristol-Myers is a solid low debt income generating candidate for further consideration and research.

Paychex Inc (NASDAQ:PAYX)

Paychex provides payroll, human resource, and benefits outsourcing solutions for small to medium sized businesses predominantly in the US. It has a market cap of $11 billion, a 52 week trading range of $25.12 to $33.91 and is trading at around $31 with a price to earnings ratio of 21.

For the third quarter 2011 Paychex reported a 3% drop in earnings to $546 million and net income fell by 6% to $140 million. However, Paychex reported a weaker balance sheet in this period, with cash and cash equivalents falling by 2.5% to $3 billion and long-term debt remained unchanged at nil.

Paychex stacks up well against its competitors as an income generating stock, paying a dividend of $1.28, which is a yield of 4% and is the second highest in the staff and outsourcing industry. It is higher than Manpower Group's (NYSE:MAN) dividend yield of 2% and Robert Half's (NYSE:RHI) dividend yield of 2%. Its return on equity of 36%, the highest in the industry is higher than Manpower Group's -6% and Robert Half's 16%.

Paychex has a forward price to earnings ratio of 19 and a profit margin of 26%, all of which bode well for further earnings and income growth. The company's debt free balance sheet is also highly appealing for an income generating stock as this means it is firmly insulated from any effects that interest rate rise will have on its net income as well boding well for the company being able to weather any further economic headwinds. The stock has a beta of 0.96, which means that it is more volatile that I would look for in an income stock but this is mitigated by its debt position.

In addition, Paychex's earnings yield of 5%, which is twice times current ten year bond yields, indicates that it is trading at around fair value. For these reasons I believe that at its current trading price Paychex is a yield play that should deliver consistent investor value.

American Electric Power (NYSE:AEP)

AEP by market cap of $20 billion is the fifth largest electric utilities company in the U.S, and it operates the generation, transmission, and distribution of electric power to retail customers primarily in the states of Arkansas, Indiana, Kentucky, Louisiana, Michigan, Ohio, Oklahoma, Tennessee, Texas, Virginia, and West Virginia. The company owns and leases approximately 37,000 megawatts of generation capacity. It has a 52 week trading range of $33.09 to $41.98 and is now trading at around $41 with a price to earnings ratio of 11.

For the third quarter 2011 AEP reported a 20% rise in earnings to $4 billion and net income rose by a massive 164% to $928 million. However, AEP reported a stronger balance sheet in this period, with cash and cash equivalents rising by 21% to $608 million and long-term debt dropping by 2% to $15 billion.

AEP stacks up well against its competitors as an income generating stock, paying a dividend of $1.88, which is a yield of 5% and is the eleventh highest in the electric utilities industry. It is higher than Southern's (NYSE:SO) dividend yield of 4% and NextEra's (NYSE:NEE) dividend yield of 4%. Its return on equity of 13% is greater than Southern's 9% and NextEra's 10%.

AEP has a forward price to earnings ratio of 13 and a profit margin of 21%, all of which bode well for further earnings and income growth. The company also has a debt to equity ratio of 0.77, which indicates a strong balance sheet that bodes well for dividend stability. When this is considered with the company's beta of 0.40 the price is relatively stable, which is a desirable attribute in a yield play. In addition, its earnings yield of 9%, which is more than three times current ten year Treasury bond yields, indicates that it is trading at a discount at current prices. For these reasons I believe that at its current trading price AEP will continue to deliver investor value and is a solid candidate as an income play.

Source: 5 High Yielding Low Debt Dividend Plays For 2012