UNCLE SAM WANTS YOU

to invest in the stock market.

That was the message delivered when the president unveiled a $670 billion economic stimulus package on Tuesday. At the center of the proposal is a big tax break on stock dividends which are essentially cash incentives paid to shareholders. (Investors are currently taxed on the dividends they receive each year.) "By ending this investment penalty, we will strengthen investor confidence," the president said Tuesday.

We at SmartMoney.com have long advocated dividend-paying stocks. Market historians note that dividends have accounted for 40% to 50% of the Standard & Poor 500's long-term returns. And unlike pro-forma earnings per share, dividends are tangible assets. Investors can reinvest them or spend them as they see fit.

Select subscribers can run it anytime. It's one of the preprogrammed SmartMoney Screens that comes with our stock-screener tool From our database of more than 8,000 stocks about 2,200 of which payout dividends we sought those with high yields.

But before we delve into the screen details, let's define our terms. We calculate a stock's dividend yieldjust look at Ford and AT&T), we prefer a more conservative approach that s based on actual payments, not future expectations.

As you'll see in our recipe (to the right), we fished for dividend yields above our database median, which was 2.4% as of Jan. 7, according to data provided by Media General. That requirement cut our dividend-yielding list of stocks to about 1,100 from 2,200. With that many stocks to choose from, we could afford to be a lot choosier. So we sought those issues with the best chances of share-price appreciation. To that end, we demanded low price/earnings ratios (below the database median of 16.25) and positive earnings growth (past and projected). And then there were 18 stocks.

But we decided to ask for more. Dividends come from a company's profits. And if a company pays out too much of their profits to entice shareholders, they may not have enough money to reinvest in their businesses. In the long run, that can lead to dividend cuts and disgusted shareholders. So we required that our screen survivors pay no more than 75% of their profits out as dividends. And then there were 16 names left on our list.

But we weren't done yet. We also eliminated the list's smaller small caps, with market values below $750 million. (We typically define a small-cap stock as one worth less than $1.5 billion.) That winnowed our list down to just seven names. Finally, we looked to our stocks' long-term performances. We found the overall returns of six of the seven survivors beat the database median over the past five years. (Remember, a stock's return includes both share-price appreciation and dividend payments.)

In the hopes that these past winners have future potential, we present you with our final six survivors: Briggs & Stratton, ConAgra Foods, New Jersey Resources, RPM International, Sasol and Washington Federal. This little list of financial, agricultural and industrial names all have attractive yields ranging from Briggs & Stratton's 3.0% to New Jersey Resources' 4.2%. The latter is an energy holding company that owns New Jersey Natural Gas. Its stock hit a new 52-week high on Monday, thanks to climbing energy costs. But, as our screen requires, the stock still looks attractive based on its price/earnings ratio of 14.6.

The biggest survivor is food processor ConAgra. The company reported climbing earnings last month, thanks to its profitable Healthy Choice meals and other branded food offerings. Those gains helped offset declines in its low-margin pork and beef businesses. All in all, the company's sales declined. But ConAgra's prospects are looking up in 2003. To prove it to shareholders, the company boosted its dividend payments in fiscal 2003 (began June 1, 2002). That marks the sixth consecutive year ConAgra has boosted its dividends. Since investors should soon get a tax break on those payoffs, ConAgra would be wise to keep them coming.