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For many of us, living on dividends and/or having cash flow lined up from dividends is essential. A strong retirement account requires solid and stable dividend income. Given the paltry yield of government bonds, high-yield stocks provide the best options for income-oriented investors.

However, one needs be careful when selecting the high-yield stocks. The so-called "yield trap" happens, when the stock looks extremely appealing based on the trailing dividend yield. However, in reality the high-yield is due to a sharp fall in stock price, which happens due to a company's substantial underperformance.

Therefore, I looked for top yielding companies that have consistent annualized earnings growth of above 5%. The trailing and forward P/E ratios are set to be under 15. As such, dividends are fully covered by the earnings. All of these companies have totally different business models, where each company operates in a different sector. Surely, investors are still subject to the market risk. However, all of these companies have experienced sustainable earnings growth rates and relatively stable profit margins among their peers. They are worth to consider for a diversified retirement portfolio:

Click to enlarge.

EXC Dividend Yield Chart

EXC Dividend Yield data by YCharts

Exelon Corporation (NYSE:EXC)

  • Market Cap: $33.15 billion
  • Sector: Diversified Utilities
  • Trailing Yield: 5.4%

Exelon has a long history that dates back to 1887. Founded in 1887, the Chicago-headquartered Exelon is one of the largest diversified utility companies in the U.S. The company has an electricity generation capacity of more than 25 thousand megawatts. This capacity is generated by a diverse portfolio of energy sources, ranging from nuclear reactors to hydro-power plants. More than 5 million households in northern Illinois and southeastern Pennsylvania purchase their electricity from Exelon. The natural gas distribution segment serves approximately 500,000 customers in the Philadelphia region.

The company has a 5-star rating from Morningstar. In the past 5 years, earnings were boosted at an annualized rate of almost 10%. Compared to other large-cap utility companies, Exelon is trading at a substantial discount. Its P/B and P/S ratios of 1.51 and 1.79 are way below industry average. Here is the recent dividend history (from Morningstar):

Date

Type

Amount

05/11/12

Cash Dividend

0.3793

03/13/12

Cash Dividend

0.1458

02/13/12

Cash Dividend

0.5250

11/10/11

Cash Dividend

0.5250

American Capital Agency (NASDAQ:AGNC)

  • Market Cap: $9.78 billion
  • Sector: Mortgage-Backed Real Estate Investment Trust
  • Trailing Yield: 15.33%

American Capital Agency operates as a giant investment company that invests in mortgage-backed securities. The company became pretty popular among income-oriented investors, thanks to its double-digit yield. As an agency-only mREIT, its portfolio consists of securities and collateralized mortgage obligations for which both the principal and interest is backed by state agencies. With a debt-to-equity ratio of 8.11, the company has one of the highest leverage ratios among its peers.

While the high debt ratio might seem a bit too risky, this is how mREITs make their profits. The leverage effect forms the backbone of mREITs' business model. Thanks to the low-interest atmosphere, American Capital Agency has substantially outperformed the broad market indices. In the last 3 years, shareholders enjoyed magnificent returns in terms of both capital gains and dividends. I think the bad jobs report is a good thing for mREITs, as there is a higher expectation for 3rd round of monetary expansion by the Federal Reserve. Here is the recent dividend history (from Morningstar):

Date

Type

Amount

03/05/12

Cash Dividend

1.25

12/20/11

Cash Dividend

1.40

09/21/11

Cash Dividend

1.40

06/21/11

Cash Dividend

1.40

Cliffs Natural (NYSE:CLF)

  • Market Cap: $6.95 billion
  • Sector: Steel & Iron
  • Trailing Yield: 5.1%

Cliffs Natural is a natural resource company that specializes in iron ore and coal mining. The company operates several mining zones in the U.S., Canada, Australia, as well as Brazil. Founded in 1847, Cleveland, Ohio-based Cliffs Natural is one of the oldest companies in the U.S.

Cliff was able to boost its profits by 55% in this year, but the stock lost nearly 42% in the last 12 months. At the current valuation levels, it is trading at very attractive ratios. Trailing P/E ratio of 4.34 and forward P/E ratio of 4.63 are one of the lowest among the basic material companies. Even if we assume "0" growth, earnings are enough to breakeven your initial investment within 5 years. Therefore, I think the stock is a bargain at these prices. Here is the recent dividend history (from Morningstar):

Date

Type

Amount

04/25/12

Cash Dividend

0.6250

02/13/12

Cash Dividend

0.2800

11/16/11

Cash Dividend

0.2800

08/11/11

Cash Dividend

0.2800

New York Community Bank (NYB)

  • Market Cap: $5.28 billion
  • Sector: Regional Banking
  • Trailing Yield: 8.3%

I am not a big fan of financial companies, but I think New York Community Bank is one of the safest investments among its peers. It strictly operates as a traditional savings and loan/thrift bank with no investment banking business. The financial sector is generally is in the oversold territory, and NYB is no exception. The stock is trading well-below its 52-week high.

Established in 1859, New York-based NYB is one of the oldest banks in the U.S. history. It operates around 250 community bank branches, 34 commercial bank branches, and almost 300 ATMs around New York, New Jersey, Ohio, Florida, and Arizona. The company's earnings per share have experienced a slight reduction of 12% in this year, but analysts expect positive earnings growth for future. The current yield is highly appealing given the relatively low financial leverage ratios. Here is the recent dividend history (from Morningstar):

Date

Type

Amount

05/03/12

Cash Dividend

0.2500

02/03/12

Cash Dividend

0.2500

11/03/11

Cash Dividend

0.2500

08/03/11

Cash Dividend

0.2500

France Telecom (FTE)

  • Market Cap: $31.42 billion
  • Sector: Telecommunication
  • Trailing Yield: 15.7%

I think there are great bargain stocks trading at dirt-cheap valuations in Europe. France Telecom is one of them. The Eurozone debt issues have driven several stocks into deep into oversold territories and France Telecom is no exception. It the largest telecommunication company in France, and third-largest in Europe. The company provides fixed telephony and mobile telecommunications, data transmission, internet, and multimedia services.

Traditionally, telecommunication companies have been among the best dividend payers in the market. France Telecom offers a double-digit yield. Compared to U.S.-headquartered telecom giants, France Telecom is a dirt-cheap deal. It is trading at single-digit P/E ratios, and offers a double-digit yield. At the current prices, it is trading almost 40% below its 52-week highs. Here is the recent dividend history (from Morningstar):

Date

Type

Amount

06/05/12

Cash Dividend

0.8718

08/31/11

Cash Dividend

0.6870

06/07/11

Cash Dividend

0.9541

08/25/10

Cash Dividend

0.6475

Source: 5 Picks For A Diversified Retirement Portfolio