The market had bounced back quite a bit until last week. However, it was spooked by Fed Chairman Jay Powell's speech in Jackson Hole. It may be an overreaction to what we already knew that Fed is likely to continue the interest rate hikes at least a few more times until there is a clear indication that either there is a significant downward trend in inflation or there is a recession at the door. On the contrary, the 10-year Treasury yield ( US10Y) changed very little on a comparative basis. As of this writing, the US10Y is at 3.09%, which is much below its previous peak of 3.48%, achieved in mid-June. So, all other things being equal, the bond yields should hold the key to the market's next move. We feel there are slightly better chances of upward movement right now than downwards, but high volatility is here to stay for the time being.

Irrespective of the market's short-term movements, as long-term DGI investors, we need to pay attention to the quality of companies that we invest in and the price we pay. Naturally, it helps to buy such companies when they're being offered relatively cheap. The goal of this series of articles is to find companies that are fundamentally strong, carry low debt, support reasonable, sustainable, and growing dividend yields, and also trade at relatively low or reasonable prices. These DGI stocks are not going to make anyone rich overnight, but if your goal is to attain financial freedom by owning stocks that should grow dividends over time, meaningfully and sustainably, then you are at the right place. We believe in keeping a buy list handy and dry powder ready so that we can use the opportunity when the time is right. Besides, we think, every month, this analysis is able to highlight some companies that otherwise would not be on our radar.

This article is part of our monthly series, where we scan the entire universe of roughly 7,500 stocks that are listed and traded on U.S. exchanges, including over-the-counter (OTC) networks. However, our focus is limited to dividend-paying stocks. We usually highlight five stocks that may have temporary difficulties or lost favor with the market and offer deep discounts on a relative basis. However, that's not the only criteria that we apply. While seeking cheaper valuations, we also demand that the companies have an established business model, solid dividend history, manageable debt, and investment-grade credit rating. Please note that these are not recommendations to buy but should be considered as a starting point for further research.

This month, we highlight three groups with five stocks each that have an average dividend yield (as a group) of 4.01%, 6.20%, and 7.37%, respectively. The first list is for conservative and risk-averse investors, while the second one is for investors who seek higher yields but still want relatively safe dividends. The third group is for yield-hungry investors but comes with an elevated risk, and we urge investors to exercise caution.

Notes: 1) Please note that when we use the term "safe" regarding stocks, it should be interpreted as "relatively safe" because nothing is absolutely safe in investing. Also, in our opinion, for a well-diversified portfolio, one should have 15-20 stocks at a minimum.

2) All tables in this article are created by the author unless explicitly specified. The stock data have been sourced from various sources such as Seeking Alpha, Yahoo Finance, GuruFocus, and CCC-List (dripinvesting).

Note: Regular readers of this series could skip this section to avoid repetitiveness. However, we include this section for new readers to provide the necessary background and perspective.

We start with a fairly simple goal. We want to shortlist five companies that are large-cap, relatively safe, dividend-paying, and trading at relatively cheaper valuations in comparison to the broader market. The objective is to highlight some of the dividend-paying and dividend-growing companies that may be offering juicy dividends due to a temporary decline in their share prices. The excess decline may be due to an industry-wide decline or some kind of one-time setbacks like some negative news coverage or missing quarterly earnings expectations. We adopt a methodical approach to filter down the 7,500-plus companies into a small subset.

Our primary goal is income that should increase over time at a rate that at least beats inflation. Our secondary goal is to grow the capital and provide a cumulative growth rate of 9%-10% at a minimum. These goals are, by and large, in alignment with most retirees and income investors as well as DGI investors. A balanced DGI portfolio should keep a mix of high-yield, low-growth stocks along with some high-growth but low-yield stocks. That said, how you mix the two will depend upon your personal situation, including income needs, time horizon, and risk tolerance.

A well-diversified portfolio would normally consist of more than just five stocks and preferably a few stocks from each sector of the economy. However, in this periodic series, we try to shortlist and highlight just five stocks that may fit the goals of most income and DGI investors. But at the same time, we try to ensure that such companies are trading at attractive or reasonable valuations. However, as always, we recommend you do your due diligence before making any decision on them.

The S&P 500 currently yields roughly 1.50%. Since our goal is to find companies for a dividend income portfolio, we should logically look for companies that pay yields that are at least similar to or better than the S&P 500. Of course, the higher, the better, but at the same time, we should not try to chase very high yields. If we try to filter for dividend stocks paying at least 1.50% or above, nearly 2,000 such companies are trading on U.S. exchanges, including OTC networks. We will limit our choices to companies that have a market cap of at least $10 billion and a daily trading volume of more than 100,000 shares. We also will check that dividend growth over the last five years is positive, but there can be some exceptions.

We also want stocks that are trading at relatively cheaper valuations. But at this stage, we want to keep our criteria broad enough to keep all the good candidates on the list. So, we will measure the distance from the 52-week high but save it to use at a later stage. Also, at this initial stage, we include all companies that yield 1% or higher. In addition, we also include other lower-yielding but high-quality companies at this stage.

By applying the above criteria, we got over 550 companies.

As a first step, we would like to eliminate stocks that have less than five years of dividend growth history. We cross-check our current list of over 500 stocks against the list of so-called Dividend Champions, Contenders, and Challengers originally defined and created by David Fish. Generally, the stocks with more than 25 years of dividend increases are called dividend Champions, while stocks with more than ten but less than 25 years of dividend increases are termed, Contenders. Further, stocks with more than five but less than ten years of dividend increases are called Challengers. Also, since we want a lot of flexibility and wider choice at this initial stage, we include some companies that pay dividends lower than 1.50% but otherwise have a stellar dividend record and growing dividends at a fast pace.

After we apply all the above criteria, we're left with roughly 295 companies on our list. However, so far in this list, we have demanded five or more years of consistent dividend growth. But what if a company had a very stable record of dividend payments but did not increase the dividends from one year to another? At times, some of these companies are foreign-based companies, and due to currency fluctuations, their dividends may appear to have been cut in US dollars, but in reality, that may not be true at all when looked at in the actual currency of reporting. At times, we may provide some exceptions when a company may have cut the dividend in the past but otherwise looks compelling. So, by relaxing some of the conditions, a total of 69 additional companies were considered to be on our list. We call them category 'B' companies. After including them, we had a total of 368 (299 + 69) companies that made our first list.

We then imported the various data elements from many sources, including CCC-list, GuruFocus, Fidelity, Morningstar, and Seeking Alpha, among others, and assigned weights based on different criteria as listed below:

Below we provide a table (as a downloadable Excel spreadsheet) with weights assigned to each of the ten criteria. The table shows the raw data for each criterion for each stock and the weights for each criterion, and the total weight. Please note that the table is sorted on the "Total Weight" or the "Quality Score." The list contains 343 names and is attached as a file for readers to download:

File-for-export_-_5_Safe_and_Cheap_DGI_-_Sep_2022.xlsx

We will first bring down the list to roughly 50 to 60 names by automated criteria, as listed below. In the second step, which is mostly manual, we will bring the list down to about 30.

From the above steps, we had a total of 66 names in our final consideration. The following stocks appeared more than once:

Appeared two times: AMAT, BBY, MSFT, NEM, SWK, TROW, VALE (7 duplicates)

After removing ten duplicates, we are left with 59 names.

Since there are multiple names in each industry segment, we will just keep a maximum of three or four names from the top of any one segment. We keep the following:

Financial Services, Banking, and Insurance:

Financial Services - Others: (MS), (TROW), (BEN)

Mining (other than Gold): (VALE), (RIO), (SCCO)

Cons-Retail: (TGT), (LOW), (HD), (BBY)

(MSFT), (AMAT), (LRCX), (TXN), (QCOM), (INTC), (AVGO)

Oil & Gas (prod. & exploration): (CVX), (PXD), (CTRA), (DVN)

This step is mostly a subjective one and is based solely on our perception. The readers could certainly differ from our selections, and they may come up with their own set of five companies with a target yield, but they should pay attention to keeping the group diversified among different sectors or industry segments. Below, we make three lists for different sets of goals, dividend income, and risk levels. We try to make each of the groups highly diversified and try to ensure that the safety of dividends matches the overall risk profile of the group. Nonetheless, here are our three final lists for this month:

Table-1A: A-LIST (Conservative Income)

We think this set of five companies (in the A-List) would form a solid diversified group of dividend companies that would be appealing to income-seeking and conservative investors, including retirees and near-retirees. The average yield is very nice at 4.01% compared to less than 1.6% of the S&P 500. The average dividend history is roughly 20 years, and four out of five companies have a credit rating of "A-" or better. The average discount from a 52-week high is very attractive for these stocks at 26.6%.

DVN (Devon Energy): This is the riskiest stock on the A-List. It also has the highest dividend yield of nearly 7%. Also, this is the only stock in the group that is not rated A- or higher, though it is still investment grade. DVN is rated as a "strong-buy" by SA's Quant Rating. Due to high energy prices and resulting strong cash flow, DVN has been acquiring a number of small players, most recently a $1.8 billion deal to acquire privately held Validus Energy that will strengthen its position in the Eagle Ford. The risk comes from the highly volatile nature of Oil prices. If the oil prices were to crash in the future (though unlikely any time soon), DVN's ability to provide the current level of dividends might become strained.

This month's A-List is for moderately conservative investors. It has a slightly higher risk profile compared to such lists in the past months. The yield is very respectable at 4.01%. However, if you must need even higher dividends, consider B-List or C-List, as presented below.

Note 1: Very often, we include a few low-risk stocks in B-List and C-list. Also, oftentimes, a stock can appear in multiple lists. This is done on purpose. We try to make each of our lists fairly diversified among different sectors/industry segments of the economy. We try to include a few of the highly conservative names in the high-yield list to make the overall group much safer.

Note 2: Please pay attention that MPLX is an MLP (Master Limited Partnership) and issues Form K-1 at tax time instead of regular 1099-Div. Please use your due diligence.

Table-1B: B-LIST (High Yield)

In the B-List, the overall risk profile of the group becomes slightly elevated compared to A-List. That said, the group will likely provide safe dividends for many years.

This list offers an average yield for the group of 6.25%, an average of 12 years of dividend history, and high dividend growth. In this list, four of the five positions offer very good discounts compared to their 52-week highs, and the average discount is -23%.

Rio Tinto: RIO has been recommended in this series for the last few months. The price has come down quite a bit on weakness, and so has the dividend. RIO's dividend is variable, and we saw that the recent semi-annual dividend was reduced. But even with a reduced dividend going forward, the yield is currently at 8.90%. That said, RIO has paid dividends continuously for the last 12 years, and the current dividend is likely to be at least maintained (if not increased) in the future. It appears to be one of the best commodity exposure stocks. Even though China's economy and growth may be cooling off but the demand for basic commodities like steel, aluminum, and copper is likely to continue growing due to the adoption of green technologies.

Note 1: Please pay attention that MPLX is an MLP (Master Limited Partnership) and issues Form K-1 at tax time instead of regular 1099-Div. Please use your due diligence.

Note 2: Oftentimes, a stock can appear in multiple lists. We try to include one or two conservative names in the high-yield list to make the overall group much safer.

Table-1C: C-LIST (Yield-Hungry, Elevated Risk)

As you can notice, the credit ratings of this group are not as stellar as the A-list, but all of them have investment-grade ratings.

MPW is a medical REIT, and its yield is very attractive at 7.75%, while MPLX is a midstream energy partnership with an 8.5% yield. The overall group is very diversified, and that makes it reasonably safe.

Apparently, this list (C-List) is for yield-hungry DGI investors, so we urge due diligence to determine if it would suit your personal situation. Nothing comes free, so there will be more risk involved with this group. That said, it's a highly diversified group spread among five different sectors.

We may like to caution that each company comes with certain risks and concerns. Sometimes these risks are real, but other times, they may be a bit overblown and temporary. So, it's always recommended to do further research and due diligence.

If we were to combine the three lists, after removing the duplicates (because of combining), we would be left with 11 unique names. The combined list is highly diversified in eight industry segments. However, there are multiple (TWO) names from some of the sectors (for example, DVN and MPLX in the Energy sector). One could remove some of them based on further research. The stats for the group of 11 are as follows:

Average discount (from 52WK High): -26.01%

In the first week of every month, we start with a fairly large list of dividend-paying stocks and filter our way down to just a handful of stocks that meet our selection criteria and income goals. In this article, we have presented three groups of stocks (five each) with different goals in mind to suit the varying needs of a wider audience. Even though the risk profile of each group is different, each group in itself is fairly balanced and diversified.

The first group of five stocks is for conservative investors who prioritize the safety of the dividend and preservation of their capital. The second group reaches for a higher yield but with only a slightly higher risk. However, the C-group comes with an elevated risk and is certainly not suited for everyone.

This month, the first group yields 4.01%, while the second group elevates the yield to 6.20%. We also presented a C-List for yield-hungry investors with a 7.37% yield. We believe the first two groups of five stocks each make an excellent watchlist for further research and buying at an opportune time.

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This article was written by

I am an individual investor, an SA Author/Contributor, and manage the “High Income DIY (HIDIY)” SA-Marketplace service. However, I am not a Financial Advisor. I have been investing for the last 25 years and consider myself an experienced investor. I share my experiences on SA by way of writing three or four articles a month as well as my portfolio strategies. You could also visit my website “FinanciallyFreeInvestor.com” for additional information.

I focus on investing in dividend-growing stocks with a long-term horizon. In addition to a DGI portfolio, I manage and invest in a few high-income portfolios as well as some Risk-adjusted Rotation Strategies. I believe "Passive Income" is what makes you 'Financially Free.' My personal goal is to generate at least 60-65% of my retirement income from dividends and the rest from other sources like real estate etc.

My current "long-term" long positions (DGI-dividend-paying) include ABT, ABBV, CI, JNJ, PFE, NVS, NVO, AZN, UNH, CL, CLX, UL, NSRGY, PG, KHC, TSN, ADM, MO, PM, BUD, KO, PEP, EXC, D, DEA, DEO, ENB, MCD, BAC, PRU, UPS, WMT, WBA, CVS, LOW, AAPL, IBM, CSCO, MSFT, INTC, T, VZ, VOD, CVX, XOM, VLO, ABB, ITW, MMM, LMT, LYB, RIO, O, NNN, WPC, TLT.

My High-Income CEF/BDC/REIT positions include:

ARCC, ARDC, GBDC, NRZ, AWF, CHI, DNP, EVT, FFC, GOF, HQH, HTA, IIF, IFN, HYB, JPC, JPS, JRI, LGI, KYN, MAIN, NBB, NLY, OHI, PDI, PCM, PTY, RFI, RNP, RQI, STAG, STK, USA, UTF, UTG, BST, CET, VTR.

In addition to my long-term positions, I use several "Rotational" risk-adjusted portfolios, where positions are traded/rotated on a monthly basis. Besides, at times, I use "Options" to generate income. I am also invested in a small growth-oriented Fin/Tech portfolio (NFLX, PYPL, GOOGL, AAPL, JPM, AMGN, BMY, MSFT, TSLA, MA, V, FB, AMZN, BABA, SQ, ARKK). From time to time, I may also own other stocks for trading purposes, which I do not consider long-term (currently own AVB, MAA, BX, BXMT, CPT, MPW, DAL, DWX, FAGIX, SBUX, RWX, ALC). I may use some experimental portfolios or mimic some portfolios (10-Bagger and Deep Value) from my HIDIY Marketplace service, which are not part of my long-term holdings. Thank you for reading.

Disclosure: I/we have a beneficial long position in the shares of ABT, ABBV, JNJ, PFE, NVS, NVO, UNH, CI, CL, CLX, GIS, UL, NSRGY, PG, KHC, ADM, MO, PM, BUD, KO, PEP, D, DEA, DEO, ENB, MCD, BAC, PRU, UPS, WMT, WBA, CVS, LOW, AAPL, IBM, CSCO, MSFT, INTC, T, VZ, VOD, CVX, XOM, VLO, ABB, ITW, MMM, LMT, LYB, RIO, ARCC, AWF, BST, CET, CHI, DNP, EVT, FFC, GOF, HCP, HQH, HTA, IIF, JPC, JPS, JRI, KYN, MAIN, MCI, TLT either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. The information presented in this article is for informational purposes only and in no way should be construed as financial advice or recommendation to buy or sell any stock. The author is not a financial advisor. Please always do further research and do your own due diligence before making any investments. Every effort has been made to present the data/information accurately; however, the author does not claim 100% accuracy. The stock portfolios presented here are model portfolios for demonstration purposes. For the complete list of our LONG positions, please see our profile on Seeking Alpha.