7 Solid Diversified Dividends

by: Quinn Bredl

We all love stocks that pay you to do nothing. With such uncertainty in the market these days, dividend-paying stocks provide investors with cash to back up earnings. Instead of buying a treasury that might pay about 1.5% in 10 years, I'd much rather buy a riskier stock that pays 40% in the same period of time. But which dividend stocks are good to buy? You could play it safe with some blue chips, but if you really want to spice up returns, add some risk with smaller names.

Here are some stocks, in all shapes and sizes, that I believe will reward investors over the long term with generous cash returns. These stocks were chosen because they are either proven names in their industry or are lesser-known companies with very tempting yields; with this balance you can make it to year's end with healthy returns. The criteria used for this selection were market cap over $1 billion, P/E under 20, dividend yield over 2.5%, net profit margin greater than 10%, and an ROE greater than 10%. I used this screen for each industry to find the cream of the crop.

SeaDrill Limited (NYSE:SDRL)

Industry: Oil and Gas Drilling and Exploration

Market Cap: $15.84 billion

52-Week Range: $24.68-$42.43

Current Share Price: $33.84

P/E: 16.90

Dividend (%): $3.28 (9.8%)

Profit Margin: 23.22%

ROE: 15.75%

(Find more stats here.)

After screening the energy sector with above-mentioned criteria, 18 stocks came up. With the second highest yield on the list, SDRL might seem like a company in distress. It is one of the riskier stocks on the list, which supports its enormous yield. But by doing a little research you can see that, using huge amounts of debt (about $10 billion worth), SDRL has rapidly expanded its fleet of drilling rigs from just 11 in 2005 to roughly 60 in 2012.

SDRL also has the advantage of a young fleet, with the average age being eight years old, while competitors such as Transocean (NYSE:RIG) and Diamond Offshore (NYSE:DO) sport average ages of 20 and 32 years, respectively. A younger fleet means that less maintenance is required, leading to lower operating costs and more money in your pocket. Benefiting from extremely high day rates for offshore drilling rigs, SDRL has been able to handsomely reward investors; however, with the volatile price of oil, demand for drilling rigs could see price swings in either direction.

CVR Partners, LP (NYSE:UAN)

Industry: Agricultural Chemicals

Market Cap: $1.60 billion

52-Week Range: $18.66-$31.00

Current Share Price: $21.90

P/E: 13.18

Dividend (%): $2.09 (10%)

Profit Margin: 45.08%

ROE: 32.38%

(Find more stats here.)

The screen on basic materials brought up 16 companies, but UAN stood out with the highest yield on the list, while also having the third-best profit margins and ROE. UAN, majority owned by recently popular CVR Energy (NYSE:CVI), is also a riskier investment. Its underlying business in the fertilizer business is not very risky, but the recent hostile takeover of its parent has spurred some concern about the fate of UAN.

What makes UAN different from other fertilizer companies is its feedstock. Companies such as CF Industries (NYSE:CF) use natural gas as a feedstock to produce fertilizers, which is beneficial during times of depressed natural gas prices. But like all other commodities, natural gas can be quite volatile. This gives UAN an advantage over competition when natural gas prices are high because its feedstock is something called petroleum coke, a byproduct of oil refining. Petroleum coke is cheaper and less volatile than natural gas. The share price has recently taken a dive for no material reason, which presents a great potential buying opportunity.

3M Company (NYSE:MMM)

Industry: Conglomerate

Market Cap: $59.36 billion

52-Week Range: $68.63-$98.19

Current Share Price: $85.55

P/E: 14.12

Dividend (%): $2.36 (2.8%)

Profit Margin: 14.53%

ROE: 26.23%

(Find more stats here.)

Now that we've added some high-risk, high-yield companies, let's head to the bunker for some greater security. (Actually, I wouldn't be surprised if 3M builds bunkers.) This screen only brought up two companies, and I'd never heard of Sauer-Danfoss, Inc. (NYSE:SHS) before, so I did a little more research. Compared to 3M, which pretty much does a little bit of everything (from tapes to air plane parts, LCD displays, office supplies and everything in between), SHS doesn't stack up very well because it isn't nearly as diversified as 3M.

3M is also a very special dividend-paying stock, garnering the coveted title of a Dividend Aristocrat. 3M has consistently raised its dividend for 53 consecutive years. From 2003 to today, 3M has doubled its EPS from $3.02 per share to $6.06, while also increasing its dividend from $1.32 to $2.36, an increase of nearly 80%. But because many of these operations depend on the overall health of the economy, it's important to note that the share price can be sensitive at times.

JPMorgan Chase (NYSE:JPM)

Industry: Money Center Banks

Market Cap: $126.96 billion

52-Week Range: $27.85-$46.49

Current Share Price: $33.35

P/E: 7.41

Dividend (%): $1.20 (3.6%)

Profit Margin: 20.78%

ROE: 10%

(Find more stats here.)

Time to spice things up again with a name that hasn't been able to stay out of the headlines. After screening through financials with this criteria and weeding out the multitudes of REITs, I found a familiar name. JPM has been hit hard by that big derivatives trading loss, but even if that loss was to double or triple, I believe the market has already factored in the worst case scenarios.

Since the trading loss was announced May 10, the stock has declined about 19%, which has cut JPM's market cap by more than $28 billion. Is a $2, $4 or even $6 billion dollar loss reason enough for such a selloff? I believe that JPM's revenue and dividend will remain strong with the help of core businesses such as commercial and mortgage banking.

China Mobile Limited (NYSE:CHL)

Industry: Wireless Communications

Market Cap: $202.90 billion

52-Week Range: $44.23-$57.29

Current Share Price: $50.54

P/E: 10.38

Dividend (%): $2.03 (4.0%)

Profit Margin: 23.84%

ROE: 20.52%

(Find more stats here.)

Now back to more certain investments. After screening the services sector, a bunch of financials popped up again, but I was looking for a sturdy phone company. With China's rapid economic growth trumping that of the U.S., and with a population nearly approaching 2 billion, it's fairly safe to say that cell phones will continue to gain popularity in China. CHL has also been in talks with Apple (NASDAQ:AAPL) to offer the iPhone on its network of 665 million subscribers. And if negotiations are successful and demand strong, we can expect to see huge upside for CHL. Growth potential coupled with a very enticing dividend gives China Mobile the telecom spot on the list.

Kraft Foods (KFT)

Industry: Food-Major Diversified

Market Cap: $67.94 billion

52-Week Range: $31.88-$39.99

Current Share Price: $38.32

P/E: 19.17

Dividend (%): $1.16 (3.1%)

Profit Margin: 6.45%

ROE: 9.56%

(Find more stats here.)

Yes, KFT is the exception on this list as it doesn't meet two criteria (Profit Margin and ROE). But as long as there are kids and lazy parents, there will be plenty of people buying food from Kraft. The company pretty much owns the packaged food business, with countless classic brands filling shelves around the world, including Oreo, Ritz, Philadelphia cream cheese, DiGiorno, Jell-O, and many more. These brands will continue to deliver strong returns in any economic climate. Since Kraft began paying a dividend in 2001, it has more than doubled, going from $.52 per year to $1.16 per year. It's also a favorite holding of Warren Buffett's Berkshire Hathaway (NYSE:BRK.A), which holds over 78 million shares, or 4.4% of the company.

Johnson & Johnson (NYSE:JNJ)

Industry: Drug Manufacturers-Major

Market Cap: $172.45 billion

52-Week Range: $59.08-$68.05

Current Share Price: $62.79

P/E: 17.22

Dividend (%): $2.44 (3.9%)

Profit Margin: 15.55%

ROE: 16.67%

(Find more stats here.)

This one was tough because the screen brought up 11 stocks, all with very attractive yields. But even though AstraZeneca (NYSE:AZN) is yielding around 7%, it doesn't offer the security of JNJ. JNJ is a major diversified healthcare company with exposure to several businesses within the industry, operating in three segments: Consumer, Medical Devices, and Pharmaceutical. It is essentially a recession-proof stock, being able to consistently grow earnings and dividends through any market.

Over the past 40 years, the average annual dividend growth rate has been around 15% (though it is slowing). JNJ is one of the safest investments out there and provides investors with a juicy, protected dividend. Jim Cramer also mentioned an interesting idea on "Mad Money" the other night, claiming that a split up of the company could realize some major shareholder value. Three separate companies (Consumer, Medical Devices, and Pharmaceutical) could provide investors with varying investment opportunities and would be an interesting split. But even if that was to happen years or even decades down the road, JNJ will pay you to wait.

So there you have it: seven stocks that offer varying levels of risk and a total average return of about 5.3% per year, which, even in this roller coaster of a market, is a whole lot better than treasuries. Oil and Gas, Agrichem, Conglomerate, Financial, Telecom, Food, and Healthcare give your portfolio the right amount of diversification to get you through the summer with all of the hair still on your head.

Disclosure: I am long UAN, SDRL.