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The Gist

An ideal investing method is to create a portfolio of stocks with significant capital gains potential and remarkable dividend yields for income generation. One reason to invest in dividend-paying stocks is they will be the investment of choice to fund the retirement of many Baby Boomers. This should create substantial demand for the stocks covered in this article.

These dividend-paying stocks have the potential for both capital gains and income production. Boomers will be looking for stocks that have a track record of increasing dividends. This will give them yet another hedge against inflation. This combination of capital gains and income production will be necessary to fund the lengthening retirement that comes with a greater life expectancy.

The Goods

In the following sections, we will perform a review of the fundamental and technical state of each company to determine if this is the right time to start a position. The following table provided by Finviz.com depicts summary statistics and Wednesday's performance for the stocks.

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Cliffs Natural Resources Inc. (CLF)

Cliffs pays a dividend with a yield of 6%. The company is trading 47% below its 52-week high and has 28% upside potential based on the consensus mean target price of $52.19 for the company. Cliffs was trading Wednesday for $41.10, down over 1% for the day.

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Fundamentally, Cliffs has several positives. The company has a forward P/E of 6.98. Cliffs is trading for slightly less than book value. EPS next year is expected to rise by 20%. The company has a net profit margin of 24.43%.

Technically, Cliffs looks like it hit an inflection point at the beginning of September marking a trend change. All the major moving averages are starting to change the angle of decent and flatten out somewhat. The company is down over two-fold from its 2008 high of $110. The stock recently bounced off a multi-year low and has moved substantially higher smashing through the 20 and 50 day smas.

The significant dividend yield combined with the fact that central bank printing presses around the globe are working overtime make the risk/reward ratio on this stock favorable. I like it here. You have to buy low to sell high.

CenturyLink, Inc. (CTL)

CenturyLink pays a dividend with a yield of 7.34%. The company is trading 8% below its 52-week high and has 13% upside potential based on the consensus mean target price of $44.59 for the company. CenturyLink was trading Wednesday for $39.65, slightly up for the day.

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Fundamentally, CenturyLink has some positives. CenturyLink's forward P/E ratio is 15.67 and the company is trading at 1.21 times book value. The company's revenue growth vastly surpassed the industry average of 7.4%. Revenues are up 171.8% year over year, although the company's net profit margin has hardly budged. Net operating cash flow has risen by 136% year over year as well.

Technically, CenturyLink seems to be consolidating just above the 200-day sma after a precipitous drop. In my last article on the stock I recommended waiting to start a position until the stock pulled back to the 200 day sma. That is essentially what has happened.

I posit the stock will continue to rise based on improving guidance and fundamentals. I believe you are safe starting a position at this level.

Frontier Communications Corporation (FTR)

Frontier pays a dividend with a yield of 8.40%. The company is trading 17% below its 52-week high and has 7% upside potential based on the consensus mean target price of $5.11 for the company. Frontier was trading Wednesday for $4.79, slightly up for the day.

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Frontier has some fundamental positives. The company is trading for slightly over book value, 93% of sales and has a forward P/E of $17.63. The company's gross margin is 90.75%.

Technically, Frontier has been in an uptrend since May. The stock is up an amazing 20.81% over the last quarter. The golden cross was achieved at the beginning of September. I have been behind the stock since the $3 mark. The stock is a buy at this level. I see the recent pullback and bounce off the 50-day sma support line as a bullish event. The stock is a buying opportunity here.

Pitney Bowes Inc. (PBI)

PBI pays a dividend with a yield of 11.05%. The company is trading 30% below its 52-week high and has 14% upside potential based on the analysts' consensus mean target price of $15.50 for the company. PBI was trading Wednesday for $13.50, slightly down for the day.

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PBI has some fundamental positives. The company is trading for 53% of sales and has a forward P/E of 6.99. The company's net profit margin is 8.15%. According to Finviz.com, the company has a ROE of 1017%. The company is increasing profits margins and cash flow from operations is healthy.

Technically, PBI has been trading sideways since taking a nosedive in May. The stock actually fulfilled a double bottom trend reversal pattern then began to sell off over the last few weeks.

Nonetheless, the stock seems to have found traction just below the 50-day sma. If the stock is able to change direction, breech resistance and break above the 50-day sma that is the time to buy.

Windstream Corporation (WIN)

Windstream pays a dividend with a yield of 10.06%. The company is trading 13% below its 52-week high and has 5% upside potential based on the consensus mean target price of $10.68 for the company. Windstream was trading Wednesday for $10.13, up almost 2% for the day.

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Windstream has some fundamental positives. The company is trading for approximately one times sales and has a forward P/E of 17.44. Sales are up 50% quarter over quarter. The company's gross profit margin is 54%. The company has a ROE of 15%. The company is increasing profits margins and cash flow from operations is healthy. The company has taken in $1.60 per share of cash flow over the past 52 weeks.

Technically, Windstream has had a recent trend reversal. The stock has been in an uptrend since the start of June. The stock is currently testing support at the bottom of the trend channel. The stock is a buy here.

The Bottom Line

The Fed's announcement it will basically employ QE in perpetuity and keep rates at ultra low levels for the foreseeable future leads me to believe these stocks are a better hedge against inflation than fixed income instruments such as bonds and CDs. Factor this in with the statistic that historically dividend-paying stocks have outperformed non-dividend-paying stocks and you have a recipe for outstanding returns.

These are S&P 500 U.S. companies with market caps of 2 billion or better which pay dividends yielding 6% or more. There may be more volatility in front of us with the recent run in the market. Nevertheless, this may be a good point to start a position in these high-yield dividend-paying opportunities.

Source: 5 Diamonds In The Rough Yielding 8% On Average With Capital Gains Upside As Well

Additional disclosure: This is not an endorsement to buy or sell securities. Investing in securities carries with it very high risks. The information contained within this article for informational purposes only and is subject to change at any time. Do your own due diligence and consult with a licensed professional before making any investment decisions.