It’s always interesting when I start looking for good stocks that will generate income through a regular dividend. I did the exercise today when looking for some good dividend stocks in the S&P500 index. There are many ways to do this but in my opinion, what you are looking for is:

#1-Stock that pays a high dividend yield (obviously)
#2-Stock that is growing its dividend or at least keeping it stable
#3-Stock that has decent earnings and should be able to keep up its dividend payments

There are of course many other factors that could be used but in my opinion, those are the most important ones.
To start off, here are the top 40 stocks in terms of dividend yield in the S&P 500:

Ticker	Name	Last Price	Dividend Yield
FTR UN Equity	Frontier Communications Corp	7.93	12.59
CTL UN Equity	CenturyTel Inc	36.93	7.57
Q UN Equity	Qwest Communications International Inc	4.29	7.37
MO UN Equity	Altria Group Inc	19.8	6.87
RAI UN Equity	Reynolds American Inc	53.4	6.74
TEG UN Equity	Integrys Energy Group Inc	42.76	6.38
POM UN Equity	Pepco Holdings Inc	17.08	6.33
PBI UN Equity	Pitney Bowes Inc	22.81	6.32
HCN UN Equity	Health Care REIT Inc	44.65	6.11
PGN UN Equity	Progress Energy Inc	41.13	6.03
HCP UN Equity	HCP Inc	30.71	6.01
T UN Equity	AT&T Inc	28.31	5.94
CINF UW Equity	Cincinnati Financial Corp	26.6	5.94
NI UN Equity	NiSource Inc	15.63	5.88
VZ UN Equity	Verizon Communications Inc	33.11	5.74
PNW UN Equity	Pinnacle West Capital Corp	37.02	5.67
DUK UN Equity	Duke Energy Corp	17.19	5.59
AEE UN Equity	Ameren Corp	28.1	5.48
LLY UN Equity	Eli Lilly & Co	36.16	5.42
SO UN Equity	Southern Co	33.37	5.25
CNP UN Equity	CenterPoint Energy Inc	14.61	5.2
ED UN Equity	Consolidated Edison Inc	45.7	5.16
LEG UN Equity	Leggett & Platt Inc	20.64	5.05
BMY UN Equity	Bristol-Myers Squibb Co	25.56	5.01
SCG UN Equity	SCANA Corp	37.93	4.96
LO UN Equity	Lorillard Inc	81.15	4.93
TE UN Equity	TECO Energy Inc	16.34	4.9
DTE UN Equity	DTE Energy Co	43.79	4.84
SE UN Equity	Spectra Energy Corp	20.74	4.82
DD UN Equity	EI du Pont de Nemours & Co	34.35	4.77
PM UN Equity	Philip Morris International Inc	49.18	4.71
FE UN Equity	FirstEnergy Corp	46.76	4.71
VTR UN Equity	Ventas Inc	43.8	4.7
AEP UN Equity	American Electric Power Co Inc	35.08	4.68
NYX UN Equity	NYSE Euronext	25.74	4.66
D UN Equity	Dominion Resources Inc/VA	39.31	4.66
KIM UN Equity	Kimco Realty Corp	13.81	4.65
MCHP UW Equity	Microchip Technology Inc	29.38	4.63
XEL UN Equity	Xcel Energy Inc	21.27	4.61
HCBK UW Equity	Hudson City Bancorp Inc	13.66	4.39

The next step required looking at growth in dividends. A company that has diminished its dividend payment in recent times is generally more inclined to do so again. So I was looking to take out companies that recently declined their dividends. That took out 7-8 names.

This brings us to the final step, determining if the company is liketlyy to be able to pay this dividend in the medium term. The way I do this is to compare the earnings of the company to the dividend yield. For example, if a company pays out a 5% dividend yield but only makes 2.5% (of its price) in earnings, then that is not sustainable.

But if a company  makes 2$ per share of earnings and pays out half of that amount in dividends, it is more logical to expect the dividend to remain intact. Doing that exercise, here are the 8 names that came out on top:

Ticker	Name	Last Price	Dividend Yield	EQY_DPS_NET_1YR_GROWTH	Earnings Yield - DVD Yield
CTL UN Equity	CenturyTel Inc	36.93	7.57	29.1810627	1.77
Q UN Equity	Qwest Communications International Inc	4.29	7.37	0	1.93
RAI UN Equity	Reynolds American Inc	53.4	6.74	1.470577717	2.02
PBI UN Equity	Pitney Bowes Inc	22.81	6.32	2.857148647	3.6
T UN Equity	AT&T Inc	28.31	5.94	2.499997616	1.53
VZ UN Equity	Verizon Communications Inc	33.11	5.74	6.000006199	1.66
LLY UN Equity	Eli Lilly & Co	36.16	5.42	4.255318642	6.78
SO UN Equity	Southern Co	33.37	5.25	4.210519791	1.68

As you can see, all of these names have a dividend yield over 5%, all but one have seen dividend increases in recent months and all are making more money thaan they are paying off. From there, it becomes more subjective and I might want to stay away from some names. For example, some might not like investing in AT&T because of its many problems and high level of competition. Other might want to avoid pharmaceuticals (Eli Lilly & Co)… But in my opinion, all of these are top 2010 dividend stock picks. Any thoughts?

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