A-Rated Dividend Stocks With High Earnings Yield

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Includes: CAT, CHE, CMI, DOV, NSC
by: Greg Group

As high yield stocks have seen their dividend yields decrease due to investor hunt for income, one alternative is to look for high quality stocks with high earnings yields. The earnings yield is the PE reversed as the earnings divided by the price. The traditional use is to create a stock metric to compare against bond yields on an apples-to-apples basis. With the 10-year bond yielding 2%, most stocks have an earnings yield greater than the bond yield. One alternative to current overpriced high yield stocks is to invest in stocks with a high earnings yield that pays an increasing dividend over time. The following list identifies stocks with an S&P A-rating, high earnings yield among this population and a growing dividend payment.

Cummins Inc. (NYSE:CMI) designs, manufactures, distributes and services diesel and natural gas engines and engine-related component products worldwide. CMI is trading at $128.16 with an earnings yield of 7.5%. It has a dividend yield of 1.25% with a 5-year annual dividend growth rate of 34%. CMI has an equity summary score of 9.9 out of 10 for a very bullish outlook. In the fourth quarter, CMI had operating EPS of $2.56 beating the $2.23 estimate. CMI did a good job leveraging incremental revenues to increase EBIT margins. For 2012, CMI guided to 10% revenue growth with a 12.5%-13.5% EBIT margin. The stock has an YTD return of 45% which is more than triple the S&P 500's 12% return.

Chemed Corporation (NYSE:CHE) provides hospice care and plumbing and drain cleaning services in the United States. CHE is trading at $63.07 with an earnings yield of 6.6%. It has a dividend yield of 1.03% with a five-year annual dividend growth rate of 22%. CHE has an equity summary score of 9.4 out of 10 for a very bullish outlook. CHE reported unaudited consolidated earnings results for the fourth quarter and year ended December 31, 2011. For the quarter, the company reported service revenues and sales were $350.253 million compared to $336.286 million for the same period last year. Income from operations was $46.026 million compared to $38.466 million for the same period last year. The stock has an YTD return of 21% which exceeds the S&P 500's return.

Caterpillar Inc (NYSE:CAT) manufactures and sells construction and mining equipment, diesel and natural gas engines, industrial gas turbines and diesel-electric locomotives worldwide. CAT is trading at $113.78 with a dividend yield of 1.62%. CAT has a five-year annual dividend growth rate of 9%. It has an earnings yield of 6.5%. CAT has an equity summary score of 9.5 out of 10 for a very bullish outlook. In the fourth quarter, EPS of $2.32, vs. $1.47, beats analyst forecasts by $0.46, with a 35% rise in revenues on strong gains in all geographies and product segments. CAT sees robust activity in emerging markets and an ongoing upgrade of machine fleets in developed areas aiding CAT further in 2012. Also, the eventual recovery of construction and industrial markets in the U.S. and Europe will extend CAT's business upturn. The stock has an YTD return of 25% which is more than double the S&P 500's 12% return.

Norfolk Southern Corporation (NYSE:NSC) engages in the rail transportation of raw materials, intermediate products and finished goods primarily in the United States. NSC is trading at $68.41 with a dividend yield of 2.73%. It has an earnings yield of 7.9% which tops the list of A-rated stocks. NSC has an equity summary score of 9.2 out of 10 for a very bullish outlook among analysts. In the fourth quarter, NSC posted the strongest revenue growth, at 17%, among rail peers. NSC benefited from positive operating leverage, growing operating income 25%. NSC's price return has lagged the S&P 500 year to date.

Dover Corporation (NYSE:DOV) manufactures and sells industrial products and components and consumables. DOV is trading at $64.33 with an earnings yield of 6.98%. It has a dividend yield of 1.96%. CMI has an equity summary score of 7.1 out of 10 for a very bullish outlook. In the fourth quarter, revenues increased 15%, with 6% being organic. Strength in its energy and industrial markets offset weakness in alternative energy and semiconductors. The stock has an YTD return of 10.5% which is slightly below the S&P 500's 12% return. DOV has a one-year price target of $72.

AmerisourceBergen Corporation (NYSE:ABC) provides drug distribution and related services to healthcare providers and pharmaceutical manufacturers primarily in the United States and Canada. ABC is trading at $38.60 with a dividend yield of 1.36%. ABC has a five-year annual dividend growth rate of 39%. It has an earnings yield of 6.7%. ABC has an equity summary score of 7.3 out of 10 for a bullish outlook among analysts. In the fourth quarter, EPS climbed 8.8% to $0.62, matching estimates. Revenue growth of 2.4% reflected a 3.9% rise in specialty volume, and a 2.4% gain in core drug distribution. ABC is on track to achieve 8% EPS growth in FY 12, helped by the integration of recent acquisitions, increased generics in the mix and stock buybacks. ABC's price return has lagged the S&P 500 year to date due to the Medco/Express Scripts merger. ABC has a one-year target price of $45.

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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.