Editor's Note: In today's "Income Watch" article, my staff and I are pleased to announce the impending release of our newest investing service. On June 1st we will launch a new newsletter devoted exclusively to income-oriented investments. Written by experienced analyst and veteran StreetAuthority writer Carla Pasternak, each monthly issue will include a wealth of information and actionable investing ideas to help you earn a steady income stream from your investments. In addition, Carla will employ a proprietary model that she has developed to help her identify the most attractively valued income stocks on the market.

If you're looking for a stable source of income from dividend-paying stocks and other high-yielding securities, then this newsletter is for you. We'll send you further details on this exciting new product in the coming weeks (at that time, we'll also incorporate it into our web site), so please be on the lookout for more information shortly.

In the meantime, in today's "Income Watch" article Carla will introduce you to the type of topics she'll cover in her upcoming newsletter, as well as to her proprietary dividend model.

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Excellent companies weren't born yesterday. That’s why my upcoming income newsletter will focus exclusively on stocks with proven track records, attractive valuations and bright growth prospects. Firms with these key characteristics are more likely to outperform their peers in both up and down markets.

What Will The Upcoming Newsletter Include?
Each month I will start out by bringing you the inside scoop on the latest market trends. I'll then move into an analysis of five timely investment ideas that you can use to profit from these trends. In our first issue, for instance, I'll profile five superior stocks that you can use to help shield your portfolio from rising interest rates. In addition, it's important to keep in mind that smart income investing isn't just about identifying high-quality companies, it's also about avoiding risky firms with significant downside potential. With that as a backdrop, I'll also bring you a list of companies to avoid in a rising interest rate environment.

After bringing you a broader market overview and a feature article filled with several specific investing ideas, I'll then move into an in-depth analysis of two timely income-oriented investments that are poised to deliver above-average returns in the months and years ahead. These in-depth profiles will introduce you to a number of new investing ideas and will provide you with all the information you'll need to make the right decisions for your portfolio.

Next, as is the case with all of our other newsletters here at StreetAuthority.com, I think it's extremely important for you to be able to track my performance from month to month. This will allow you to gauge the profitability of my investment ideas. After all, I only want you to subscribe to my newsletter if it helps you generate real, meaningful long-term profits. With this in mind, I'm going to organize my top income picks into a variety of recommended portfolios. One portfolio will cover high-yielding dividend stocks, another will feature attractive-looking REITs (Real Estate Investment Trusts), and the final portfolio will cover income-oriented ETFs (Exchange-Traded Funds). In each issue I'll not only provide you with a detailed performance summary for each of these three portfolios, but I'll also bring you updated guidance and an analysis of recent events that you should be aware of if you hold any of these investments.

Register for Carla Pasternak's High-Yield Investing newsletter today and you'll receive as many as SIX in-depth research reports absolutely FREE!

Proprietary Dividend Model
After bringing you continued guidance on my three sample portfolios each month, I'll then move into an analysis of my proprietary dividend model. Although all of the above information should be prove to be extremely useful for the average income investor, my proprietary dividend model is what will really set my newsletter apart from the pack. With this in mind, I'm going to devote the rest of today's article to an analysis of my model. To help prepare you for the model and to give you a better sense for how it works, here's a quick look at some of the details:

My proprietary dividend model consists of two primary steps. First, I use a high-powered screening tool to narrow the vast investing universe (which consists of about 10,000 stocks) down to a list of just 100 companies with superior income characteristics. Among other things, I look for firms with above-average dividend yields (higher than the average S&P 500 component, which currently yields about 1.65%), extensive track records of strong dividend growth, superior earnings growth, etc. Although historical performance is no guarantee of future success, I'm confident that the 100 companies that managed to meet my stringent criteria here will deliver superior returns going forward.

This initial screen, which I will perform just once per year in the future, leaves me with a list of 100 possible income investments. However, to help you identify the cream of the crop from this list, I decided to come up with a way to rank each of these 100 stocks throughout the year. To accomplish this, I developed a proprietary scoring system that assigns points to each of these companies based on certain key income-oriented criteria. Although the specific details of this scoring system are proprietary, here are a few of the general items that the model looks for:

-- The higher a stock's dividend yield, the greater the number of points it receives.
-- The higher a stock's 5-year average dividend growth rate, the greater its point total.

In addition to these items, my formula looks at each firm's dividend yield in relation to its 5-year average. Over time, every company's yield will tend to fluctuate both above and below its five-year average. One of the goals of my model is to capture stocks when they are delivering higher-than-average dividend yields (such stocks are usually undervalued), and to avoid stocks that are currently delivering below-average yields (these stocks tend to be overvalued). With this in mind, my model assigns positive points when a stock's yield is above its 5-year average, but subtracts points from companies that are currently delivering below-average yields (relative to their own unique historical averages).

Based mainly on these key criteria, my proprietary model assigns a unique ranking to each and every one of the 100 income stocks in our investing universe. To assist you in sifting through the data, I then sort this list based on each company's proprietary rank. The important thing to understand is that the higher a firm's point total based on my scoring system, the better. In addition, because a company's stock price and dividend yield change every single day, please keep in mind that my ratings fluctuate regularly. Because of this, I will always make sure to include a revised ranking for all 100 stocks in each and every one of my monthly newsletter issues. This will ensure that I provide you with the most timely investment ideas possible.

In the table below you'll find the most recent rankings (as of the close of trading on Friday, May 14th) for all 100 income stocks based on my proprietary scoring system:

How Can You Take Advantage Of This Information?
With thousands of income-oriented stocks to choose from, it's often hard for income investors to know where to start. The dividend table above, which I will include in EVERY issue of my upcoming newsletter, should assist you in your search for reasonably valued income stocks with above-average, growing dividend yields. My proprietary model not only narrows down the extensive investing universe to a select list of superior income picks, but the ranking system also helps you sort out the best of the bunch. Here are some items to look for when using the table:

-- Focus in on the top 25 companies (highlighted in yellow). Based on my model, these stocks should tend to outperform their peers in the coming months. All other things being equal, investors might want to accumulate these issues in the near term.
-- Look for companies that are moving up or down in the rankings. Stocks that are moving up could represent compelling value plays. Meanwhile, companies that are moving down in the rankings might have cut their dividend payments, or their stocks might be richly valued relative to historical norms.
-- Focus in on the bottom 25 companies (highlighted in gray). Based on my model, these stocks are richly valued relative to their underlying dividend characteristics. As such, they are likely to underperform their peers going forward. All other things being equal, investors might want to reduce their exposure to some of these names in the near term.

How Can We Be Sure That The Model Works?
Because I based both my initial screen and my proprietary scoring system on time-tested fundamental principles, I'm confident that the dividend model will outperform the broader market in the months and years ahead. However, in order to make sure the model outperforms, each month I'm going to track the average performance of the top 25 picks identified in the table above. I'm then going to compare that performance against the S&P 500, as well as an appropriate income-oriented benchmark. And finally, because I think it's important to test whether the model is effective in identifying income stocks that you might want to reduce your exposure to, I'm also going to track the average performance of the bottom 25 picks identified in the table above. I'll then compare their performance to the S&P, as well as to that of the top 25 picks. As long as the top 25 picks consistently outperform the bottom 25 by a statistically significant margin, I will consider the model effective.

What Can You Expect To See?
Each month I'll present you with updated performance data, as well as NEW lists of the top and bottom 25 companies identified by my dividend model. Remember: These rankings change on a daily basis along with stock prices. Therefore, as prices and yields shift in the coming weeks, the top 25 companies identified by the model will change from month to month as stocks move up and down in my rankings.

Reminder
Again, it's important to emphasize the fact that this is a strictly quantitative model. Both the initial screen and my unique scoring system are based entirely on raw, objective data. I do not take any other fundamental factors into consideration and I do not make any subjective judgments at any time. The fact that I hold to this strictly quantitative approach is important, because if it succeeds in identifying income stocks that outperform their peers in the months and years ahead, then I'll be able to continually re-use this exact model to identify other undervalued income plays in the future.

Please look for this proprietary dividend model, as well as a host of other valuable income-oriented investment advice, in the June 1st issue of my upcoming income newsletter. Check your inbox in the coming weeks for further details!

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