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Investors are really starting to ponder the implications of a higher interest rate environment on their portfolios as signs of a strengthening economy becoming more prevalent. This week, the FOMC will announce their intentions for further quantitative easing (QE), an event that would affect the value of long-term bonds as interest rate risk continues to rise.
With mutual fund inflows having dominated almost every month of last year, it is clear that the bond fund market is susceptible to selling pressure. This means that investors may have to start foraging for income from other sources as they move out of bond funds.
Given this situation, the stage appears to be set for dividend yielding stocks to fall back into heavy favor with investors looking to reallocate income-yielding assets from bond funds.
We've narrowed down the best-yielding dividend stocks in the S&P 500 by filtering them through our proprietary scoring system. This system takes current trend, relative strength (RS) and probability of a continued trend into account, along with other technical and sentiment indicators to determine the likelihood that a stock will continue its leadership.
The table below displays the top ranked dividend stocks with yields above 4% from the S&P 500 based on their current technical scores (5 being the highest).
Looking at this list of dividend stocks, there are a few that appear to present a short-term and long-term bullish case.
SCANA Corp. (NYSE: SCG)
This utility company engages in the generation, transmission, distribution and sale of electricity to retail and wholesale customers in South Carolina. At the current price of just under $50, the shares offer a dividend yield of 4.1%.
Year to date, SCANA stock has kept pace with the S&P 500 with a return of about 7.5%, paying out a $0.51 dividend earlier this month. SCG is close to breaking through its all-time high at $50.34, which was made in August 2012. This is enough to make the short-term trade attractive, but there's more.
Short sellers have been busy selling the stock on margin, increasing the potential for a short squeeze rally on the move into new high territory. For this reason, our research suggests that SCG is likely to outpace the market over the short term.
If a near-term pullback to $48.50 from its current consolidation around $49 occurs, this would offer traders an even better price to buy the shares before a potential breakout as short sellers get squeezed from their positions.
Recommended Trade Setup:
-- Buy SCG at the market price-- Set stop-loss at $47-- Set initial price target at $60 for a potential 21% gain by year-end
Darden Restaurants (NYSE: DRI)
This company operates well-known restaurant chains like Olive Garden, Red Lobster and Longhorn Steakhouse. Some traders may have worried that sequestration and new payroll taxes could hurt DRI's business. To date, though, discretionary spending appears to be little phased by the economic pressures.
The company pays a 4.1% dividend, putting it among the higher dividend yielding companies within the S&P 500. With a current score of 4 from our system, it ranks as one of the stronger candidates for continued strength in 2013.
Darden remains one of the least-recommended stocks in the S&P 500, as 66% of the analysts covering the company have it ranked a "hold" or "sell." From our perspective, this suggests that the stock could see some upgrades, helping it gain buyers along the way.
On the chart, we see that shares remain in bull market territory, trading above their 50-day trendline. Recent selling pressure tested a floor of $44 and intermediate-term prices are in the process of transitioning into a positive trend.
Darden's pricing makes it attractive from a technical perspective. The addition of a 4.1% yield provides even more fodder for investors looking to generate some income from their portfolio.
-- Buy DRI at the market price-- Set stop-loss at $47-- Set initial price target at $60 for a potential 23% gain by year-end
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