Investors have been loading up on dividend
stocks for good reason: These stocks are trouncing the puny 2% yield
. In fact, more than 200 stocks in the S&P 500 currently yield better than Treasuries. And in addition to higher yield, dividend stocks are delivering superior overall returns. For instance, high-yield stocks were the top-performing group in the S&P last year, and the 50 highest yielders returned an eye-popping 18.5%, nearly nine times the 2.1% return of the S&P during that period.
If dividend stocks continue to outperform, then it's likely more companies will start paying dividends. Additional incentives come from retiring baby boomers, who will most likely switch to income-generating investments rather than riskier growth stocks. Given this rosy outlook for dividend stocks, there are many companies not paying dividends now that will possibly ponder commencing payments soon.
Finding stocks that can afford to pay dividends is easy. Any company that has a stockpile of cash, modest debt and ample cash flow is a possible candidate. The difficulty lies in identifying stocks that could potentially start paying dividends. No one can predict the future, but a good starting point is to track financially-strong companies that are undervalued or have weak returns.
With this in mind, I ran a screen for companies that have good earnings, abundant cash, strong cash flow and little long-term debt. I then refined the list to companies trading at low price-to-earnings (P/E) and price-to-cash flow (P/CF) ratios.
Here are the three stocks that make the top of my list...
1. Tech Data Corp. (Nasdaq: TECD)
Tech Data is one of the world's largest distributors of information technology (IT) products, with more than 125,000 resellers in more than 100 countries.
Last year alone, the company sold $24 billion of IT products.