MW If you love dividend stocks, check out these 11 companies with room to boost their hefty payouts

By Philip van Doorn

A strict screen based on companies' expected generation of free cash flow over the 12 months highlights a handful of stocks with dividend yields as high as 5.5%.

If you want to generate income from your investment portfolio, you can easily spread your risk across a large group of stocks through mutual funds or exchange-traded funds, some of which in turn pay dividends monthly. But you might also want to hold individual stocks as part of a diversified income strategy.

Below is a screen designed to identify high-yielding dividend stocks whose payouts are expected to be well supported by cash flow over the next year.

This isn't necessarily the best way to screen dividend stocks. A lot depends on your investment objectives. If high yields with a degree of safety appeal to you, this screen might be a good starting point. But here are other approaches to dividend stocks we have covered this year:

-- Dividend stocks of companies expected to grow revenue and earnings rapidly

-- Dividend stocks that trade at low valuations to earnings estimates, selected by John Buckingham, the editor of the Prudent Speculator

-- Dividend compounders - companies whose long-term shareholders have been rewarded with consistently increasing dividends

Screening high-yielding dividend stocks

One way to estimate a dividend-paying company's ability to maintain and hopefully raise its payout is to look at its estimated free cash flow yield.

Free cash flow $(FCF)$ is remaining cash flow after capital expenditures. This money can be used to pay dividends, buy back shares (which can raise earnings and cash flow per share), fund acquisitions or organic expansion, or for other corporate purposes.

If we divide a company's estimated FCF per share for the next 12 months by its current share price, we have its estimated FCF yield. If we compare the FCF yield to the current dividend yield, we may see "headroom" for cash to be deployed in ways that can benefit shareholders. If a stock with a 5% dividend yield has an estimated FCF yield of 7%, it appears to have headroom of 2%. That might be a good enough cushion depending on a company's industry and prospects, but we took a more strict approach for the following stock screen.

We began the screen with the components of the S&P 1500 Composite Index XX:SP1500, which is made up of the S&P 500 SPX, the S&P MidCap 400 Index MID and the S&P Small Cap 600 Index SML. Then we narrowed the list as follows:

-- Dividend yield of at least 4%. That yield may not seem especially high when the federal-funds rate is in a target range of 4.25% to 4.50%. But one can never predict the direction of interest rates. And with dividend-paying stocks over the long term, you might see capital growth as share prices increase, along with the possibility of increasing dividend payouts.

-- Coverage by at least five analysts working for brokerage or research firms polled by FactSet. This ensures a decent-sized sample of estimates underlying the forward dividend headroom calculations.

-- Estimated free-cash-flow yield at least double the current dividend yield, based on consensus estimates for the next 12 months among analysts polled by FactSet. In other words, the estimated headroom exceeds the current dividend yield. This should provide a margin of safety against the possibility of dividend cuts.

For most companies in the financial sector, especially banks and insurers, FCF information isn't available. But in these heavily regulated industries, earnings per share can be a useful substitute to make similar headroom estimates. We also used EPS for real-estate-investment trusts that engage mainly in mortgage lending.

For REITs that own property and rent it out (known as equity REITs), we can make similar use of funds from operations (FFO), a non-GAAP figure commonly used to gauge dividend-paying ability in that industry. FFO adds depreciation and amortization back to earnings, while netting out gains on property sales. This can be taken further with adjusted funds from operations (AFFO), which subtracts the estimated cost to maintain properties the REITs own and rent out.

In the following table, the right-most column indicates which data fed the "estimated FCF yield" column: FCF, EPS or AFFO.

Only 11 companies passed the screen, with estimated FCF yields at least double the current dividend yields. Here they are, sorted by dividend yield:

   Company                         Ticker    Dividend Yield  Estimated FCF yield for the next 12 months  Expected headroom  FCF yield calculation method 
   Kohl's Corp.                    KSS                5.46%                                      36.94%             31.48%                           FCF 
   Macy's Inc.                     M                  5.37%                                      18.98%             13.60%                           FCF 
   Viatris Inc.                    VTRS               5.36%                                      19.43%             14.07%                           FCF 
   APA Corp.                       APA                4.79%                                      16.25%             11.47%                           FCF 
   Lincoln National Corp.          LNC                4.78%                                      20.90%             16.13%                           EPS 
   Travel + Leisure Co.            TNL                4.62%                                      16.68%             12.06%                           FCF 
   Cable One Inc.                  CABO               4.46%                                      17.73%             13.26%                           FCF 
   Crescent Energy Co.             CRGY               4.15%                                      24.48%             20.33%                           FCF 
   Nexstar Media Group Inc.        NXST               4.11%                                      17.23%             13.12%                           FCF 
   American Eagle Outfitters Inc.  AEO                4.08%                                      12.91%              8.83%                           FCF 
   Xenia Hotels & Resorts Inc.     XHR                4.03%                                      12.71%              8.68%                          AFFO 
                                                                                                                                         Source: FactSet 

A stock screen is only a snapshot. Before investing in any individual stock, you should do your own research to form your own opinion about how likely a company is to remain competitive over the next decade, at least.

Don't miss: Four AI stocks to buy now and hold, says the manager of a five-star, $58B global fund

-Philip van Doorn

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March 26, 2025 11:20 ET (15:20 GMT)

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