Investors wanting to pick undervalued stocks need to look closely at dividend. For one thing, dividend drops money straight into your pocket. Your stock price do not have to rise to make profits. Another thing is that only company that have extra cash will give dividends. This requires them to be highly profitable. Investing in profitable companies will breed success if investors buy them at the right price. Finally, once initiated, management will fight its best not to abolish its dividend. Case in point was Schering Plough Corp. (SGP). It spotted $ 0.22 dividend per share while it hasn't been profitable in 2003.

One final allure is the possibility of capital appreciation. A lot of times, companies with a high dividend yield, has a lower valuation than others. For example, some companies are offering a dividend yield as high as 6%, which is higher than the yield of treasury bond. One such company is Flagstar Bancorp (FBC) with 6.1% dividend yield. The common stock gives $ 1 in dividend, while its earning per share is predicted to be $ 1.70 in 2005. Earning was as high as $ 4.00 per share in 2003. Assume that FBC can earn $ 1.70 per share forever, then its share price can rise to above current price of $ 16.50.

Having said that, investors should be careful of dividend trap. Some companies may cut future dividend due to deteriorating condition of their financials. That is why it is extremely crucial to predict the fair value of the common stock before investing in them. Dividend is just part of the equation. Case in point was the former AT & T Corp. (formerly traded with symbol T). It used to be valued north of $ 100 Billion and was giving out decent dividend. Now, it has fallen to less than $ 20 Billion, while the dividend too has been cut.

Here are several dividend payers that might spike your interest:

SBC, Bellsouth and Verizon Communications. They are all in the telecommunication sectors and offer dividend yield of 4.4 to 5.4%. Stock price has been going nowhere for the past year due to investor skepticism of competitors undermining their dominance in the telecommunication market.

Pfizer, Bristol Myers Squibb and Merck. The pharmaceutical sector has been battered in recent years. Merck's legal problem with Vioxx also creates negative sentiment towards the sector. These three companies have a dividend yield of between 3 to 5.6%.

Bank of America, Citicorp and Washington Mutual. The banking sectors have been known to give generous dividends. Currently, they are all have a dividend yield of between 3.90% and 4.8%. But with the federal reserve still in tightening mode, I feel that bank stocks can be bought at an even cheaper price sometime in the future.

Hari wrote regularly at http://www.noviceinvesting.com His useful commentary can be viewed for free.

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