You can’t trust earnings anymore. So what should you look for? Dividends. They are harder to fake. We went hunting for stocks with solid cash dividends but didn’t do the obvious thing: Rank all stocks by yield and select the highest. If you simply want the highest yields, go for real estate investment trusts (see p. 126). Or take a chance on tobacco. On page 140 David Dreman makes the case for Philip Morris, which yields 4.7%.

The list below features dividend stars of a different sort. Their yields are only so-so, averaging 2% or so, but their dividends are well covered and rising. The percentage of earnings being paid out is small. Only a deep and prolonged earnings contraction would force these outfits to shrink their payouts. These companies have been raising dividends recently (three-year growth of 3% or better). They also all have good balance sheets: debt less than 50% of total capital and interest coverage (earnings before interest and taxes, divided by interest) greater than 1.5.

Headquartered in Menasha, Wis., Banta Corp. prints everything from Bibles to software manuals. Banta earned $50 million last year on revenue of $1.5 billion and distributed $15 million of that to shareholders. Banta’s free cash flow, in the sense of net income plus depreciation minus capital expenditures, has been positive for the past ten years.Michael Friedman, equity analyst with New York brokerage Sidoti & Co., notes that the company has recently trimmed capital expenditures in light of the economy’s downturn. Shareholder payouts first, expansion second.

Contrast Banta with a stock such as Bristol-Myers Squibb, which now yields a robust 4.8%. Using the consensus mean estimate for 2003 EPS, Bristol-Myers shows a payout of 69%. Switch to the most pessimistic profit projection for next year, and the expected payout climbs to 78%–not exactly reassuring.

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In this turbulent market, investors seem to have even lost their appetite for stocks in traditionally defensive areas such as drugs, managed care and medical devices. Health stocks in the S&P 500–while faring better than the overall index–are still down 18% for the year.

“None of these sectors is emotion-proof,” says William Meade, managing director and institutional sales specialist with RBC Capital Markets, an investment bank headquartered in Toronto.

This dip may well be an opportunity. Valuations for many health care and medical companies are low relative to history–and 79 million baby boomers aren’t getting any younger. By 2011, estimates the Centers for Medicare and Medicaid Services, health care expenditures in this country will hit $2.8 trillion, or 17% of gross domestic product.

Health stocks also come with certain risks, namely from Washington. These include the possibility of declining reimbursement levels, the push to control drug prices and the unpredictability of actions by the Food and Drug Administration. But RBC’s Meade isn’t too worried about the government: “This administration is much more company-friendly because they realize that costs do have to go up.”

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Wall Street has taken BellSouth’s stock to the shed lately. Since topping out at $43 in September, shares of the Atlanta-headquartered Baby Bell have lost nearly half their value.

Insider activity, however, tells a less grim tale. Over the past six months, insiders have scooped up 10,000 BellSouth shares. Amount of insider selling: none.

That’s a drop in the bucket–BellSouth has nearly 1.9 billion shares outstanding–but it’s an encouraging sign. Contrast that to another Baby Bell, SBC Communications, where insiders have also bought 10,000 shares but dumped 211,000 during the same period.

Of course, the motives for insider selling aren’t always ominous–an insider may be financing a kid’s college education or building a new house. Still, a predominance of insider buying is at the very least reassuring, if not a positive reflection of the company’s outlook.

Moreover, net insider buying often signals an undervalued stock. BellSouth, for example, goes for 1.8 times latest 12-month sales versus a five-year average price-to-sales (PSR) multiple of 3.3. And BellSouth shares sell for just ten times projected 2003 earnings.

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Oakmark Funds, a chicago-based unit of Harris Associates that oversees $15 billion in assets, calls value investing its cornerstone. With the Nasdaq down 70% from its March 2000 high, the technology sector has drawn Oakmark’s attention. On its shopping list: Israeli stocks carried on U.S. exchanges.

Why look for a stock pick from a place like the Middle East? Robert Taylor, an investment analyst with Oakmark’s $1.5 billion (assets) International Fund, points to as good a reason as any: low taxes. Under Israel’s “approved enterprise” program, Israeli firms spending certain amounts of money locally on research and capital expenditures get their tax bill chopped by up to two-thirds.

Its favorable tax environment helps explain why Israel, a country with a population of just 6.4 million, attracted more venture funding ($3.3 billion) last year than Italy ($2.7 billion), Korea ($1.6 billion)and Taiwan ($1.1 billion), according to PricewaterhouseCoopers.

The tax rate of Check Point Software Technologies, a maker of encryption software for computer networks, is just one example. In its latest fiscal year, ended last December, Check Point’s effective tax rate was 15.6%, up slightly from 14.4% in 2000, but still well under the standard Israeli tax rate of 36%.

Christopher D. Alderson, head of emerging-market equities with T. Rowe Price, likes Check Point’s 95% gross margins and $500 million in cash and equivalents. “That’s pretty extraordinary for a company that’s only been going seven years,” he says.

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One investing rule of thumb says to look for companies with high returns on equity. The approach is perfectly logical.

Return on equity (ROE), calculated by dividing net income by shareholder equity during a particular period, measures the return that management has produced on the money invested into the business. It makes sense that investors, i.e. shareholders, would seek out companies with healthy double-digit returns on equity.

So, why would anyone consider a company with low ROE? For starters, companies with low ROE may get overlooked or beaten down more than warranted because of their lackluster returns. And, sometimes, a slump in profitability may not be representative of long-term potential.

Take, for example, Andrew Corporation, a maker of cables, antennas, power amplifiers and other equipment for wireless and fixed-line communications. On a latest 12-month basis, return on equity for the Orland, Park, Ill.-based company stands at 9%, down from a three-year average of 11% and a five-year average of 15%.

Given the ongoing drought in capital spending and the ugly overall situation in telecommunications, it’s not difficult to understand why Andrew’s profits have suffered. The market, however, may have treated the stock a bit too harshly. At a recent $13, Andrew shares have fallen 47% since hitting a 52-week high in January.

If investors warm again to wireless stocks, Andrew looks poised to benefit. The company has taken advantage of its healthy balance sheet to make acquisitions and shore up its market position. In early June, the company completed its $470 million acquisition of Celiant, thereby becoming the leading U.S. maker of wireless-signal amplifiers.

To assemble our list of companies with low ROEs but promising prospects, we screened for companies with the following characteristics: ROE in the single digits and below their three-year and five-year averages; latest 12-month price-to-earnings multiple of 30 or less; and market capitalization greater than $500 million.

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Despite a 31% drop since the beginning of the year, it still may be premature to call a bottom for the Nasdaq Composite. The index managed to lose 5% last week and was off another 3.4% through midday on Monday. But, whatever the market’s immediate direction, some Nasdaq stocks look pretty attractive.

We screened for Nasdaq-listed stocks that have held up well relative to the overall index but still look cheap relative to their estimated earnings growth potential.

Example: Clearwater, Fla.-based Lincare Holdings (nasdaq: LNCR – news – people ), the country’s No. 2 provider of home respiratory services. The company delivers oxygen supplies to home-based patients suffering from such ailments as emphysema, chronic bronchitis and asthma.

Lincare, which has nearly 600 operating centers in 44 states, has been steadily increasing its share of the fragmented $4.5 billion home respiratory market through acquisitions and internal growth. In 2001, for example, the company acquired 18 smaller outfits, thus adding 15 operating centers to its roster.

Analysts reporting to Thomson Financial/IBES expect more such growth ahead for Lincare, forecasting that the company’s revenue will increase to $958 million in 2002 and to $1.1 billion in 2003, from $812 million for its latest fiscal year (ended December).

As for earnings, analysts predict Lincare’s profits will show annualized increases of 21% over the next three to five years. This means the stock, trading at just 17 times estimated next 12-month earnings of $1.76 per share, has a 12-month forward price-to-earnings growth (PEG) ratio of 0.8.

An investing rule of thumb says that stocks with PEGs less than 1 are undervalued. To assemble our table of Nasdaq picks, we started with stocks that carry low PEGs. For the group, 12-month forward price-to-earnings multiples average 17, while 2003 estimated P/Es average out at 14.

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NEW YORK – Found just under the “cash and equivalents” line on the balance sheet, accounts receivable refers to money owed a business for goods or services already provided. It’s useful to consider this item in the context of sales performance. In other words, if sales are rising while receivables are falling, it’s a pretty good sign that customers are either paying faster or the company is having fewer collection problems.

Example: Fluor, a contracting and engineering firm based in Aliso Viejo, Calif. The company’s swelling backlog of new projects has hit $11.6 billion as of its March quarter, a 14% increase from levels a year earlier. Recent engagements range from building a 365-room Ritz-Carlton resort in the Grand Cayman Islands to constructing test facilities for the Army Corps of Engineers’ missile defense research.

Fluor’s balance sheet suggests that customers are also paying their bills. For the most recent quarter (ended in March), receivables stood at $564 million, down 25% from $748 million a year earlier. Meanwhile, sales rose 31%, to $2.5 billion, during the same period.

Fluor looks like a company that will benefit from a recovering economy, but the stock hasn’t attracted quite the same attention that investors have paid to cyclical sectors such as natural resources or media. Shares of Fluor are trading 38% off a 52-week high set a year ago, and the stock’s 2003 estimated P/E of 14 falls well below the S&P 500’s estimated multiple of 21.

Full story at Forbes.com