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Income Investing: 3 Undervalued High Yield Dividend Stocks

On Monday, yields on 10-year US Treasury bonds dropped to 2.566%, the note's lowest level this year. Weak manufacturing data from China and ongoing concerns over Ukraine have pushed investors toward the safety of Treasury bonds. And last week's job report, which beat expectations with the addition of 288,800 jobs in April, also helped attract more investors.

Bond prices and yields have an inverse relationship, so when the price of a bond rises - as is the case with the ongoing Treasury rally - the yields on the bonds fall. For income investors, this means that for the time being, Treasury bonds aren't generating the income they want. Enter: high yield dividend stocks.

High yield dividend stocks can be a mixed bag. While they offer investors more money than stocks with smalleryields, the big payouts can be unsustainable for companies, leading them to cut or stop the payments entirely. So it's important to take a closer look at a company's fundamentals when considering such stocks.

We decided to look for investment opportunities among high-yield dividend stocks for the following list. To begin, we constructed a universe of stocks with dividend yields between 5-10%.

We then screened for potentially undervalued stocks as suggested by a price-earnings (P/E) ratio of 15 or lower. We used 15 as our upper limit because, as Investopedia notes, the market's average P/E ratio tends to fall between 15 and 25.

Since companies use their earnings to pay dividends to shareholders, we wanted to narrow down our group to a list of stocks with a proven track record of EPS growth, which could indicate that the high dividend payouts are sustainable for the companies.

So we screened for firms that have reported rising diluted normalized earnings per share (NYSEARCA:EPS) for the past three consecutive years. Typically, diluted normalized EPS is lower and more conservative than normalized EPS.

We were left with three undervalued high yield dividend stocks on our list.

Do you think rising profits will help these stocks with their high dividends? Use this list as a starting point for your own analysis.

1. Alto Palermo S.A. (APSA, Earnings, Analysts, Financials): Engages in the ownership, acquisition, development, leasing, management, and operation of shopping centers, as well as residential and commercial complexes in Argentina. Market cap at $673.8M, most recent closing price at $18.67.

Dividend yield is 9.61%. The company has consistently paid a semi annual dividend since 2011, when its dividend was $1.03. Its current dividend stands at $0.61.

P/E ratio is 14.03.

Diluted normalized EPS increased from 0.09 to 0.13 during the first time interval (12 months ending 2011-06-30 vs. 12 months ending 2010-06-30). For the second time interval, diluted normalized EPS increased from 0.13 to 0.13 (12 months ending 2012-06-30 vs. 12 months ending 2011-06-30). And for the last time interval, the EPS increased from 0.13 to 0.26 (12 months ending 2013-06-30 vs. 12 months ending 2012-06-30).

2. Courier Corporation (CRRC, Earnings, Analysts, Financials): Engages in printing, publishing, and selling books. Market cap at $165.83M, most recent closing price at $14.37.

Dividend yield is 5.91%. The company has consistently paid a quarterly dividend since 1989, when its dividend was $0.10. Its current dividend stands at $0.21.

P/E ratio is 14.21.

Diluted normalized EPS increased from 0.83 to 0.89 during the first time interval (52 weeks ending 2011-09-24 vs. 52 weeks ending 2010-09-25). For the second time interval, diluted normalized EPS increased from 0.89 to 0.94 (52 weeks ending 2012-09-29 vs. 52 weeks ending 2011-09-24). And for the last time interval, the EPS increased from 0.94 to 1 (52 weeks ending 2013-09-28 vs. 52 weeks ending 2012-09-29).

3. Starwood Property Trust, Inc. (STWD, Earnings, Analysts, Financials): Focuses on originating, investing in, financing, and managing commercial mortgage loans and other commercial real estate debt investments, commercial mortgage-backed securities, and other commercial real estate-related debt investments. Market cap at $4.71B, most recent closing price at $24.05.

Dividend yield is 7.94%. The company has consistently paid a quarterly dividend since 2010, when its dividend was $0.22. Its current dividend stands at $0.48.

P/E ratio is 13.36.

Diluted normalized EPS increased from 1.11 to 1.44 during the first time interval (12 months ending 2011-12-31 vs. 12 months ending 2010-12-31). For the second time interval, diluted normalized EPS increased from 1.44 to 1.8 (12 months ending 2012-12-31 vs. 12 months ending 2011-12-31). And for the last time interval, the EPS increased from 1.8 to 1.93 (12 months ending 2013-12-31 vs. 12 months ending 2012-12-31).

(List compiled by Mary-Lynn Cesar. Dividend data sourced from Nasdaq. EPS data sourced from Yahoo! Finance. Monthly return data sourced from Zacks Investment Research. All other data sourced from Finviz.)

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