The Magic Formula's Top 11 Dividend Stocks

In a down economy, many money managers recommend that investors focus on dividend paying stocks. There are many attractive qualities to owning dividend paying stocks, some of which I've written about before. In a weak market, though, dividend-paying stocks can be even more attractive. As stock prices fall, companies that can maintain or increase their dividend payout provide an increasing dividend yield to their stockholders. When you buy into a company that can sustain or even increase a high yield, you are effectively "locked in" to that high yield, which compounds every year, in addition to the likely capital gain of stock price appreciation.

It's important to note, that in this economy dividend cuts and eliminations are pretty common, as companies get conservative with their cash. What can look like a can't miss opportunity for locking in a high dividend yield can vanish in a hurry when the press release announcing a dividend cut comes across the wire. It's important that investors make sure that the prospective company has a comfortable margin for paying out the dividend before making the investment.

To provide some ideas, I've looked over the Magic Formula screens used here at MagicDiligence (the top 100 stocks over $50 million market cap and the top 50 over $2 billion), looking for companies with solid yields of 3.4% or more and a dividend-to-earnings (payout) ratio of 45% or less. This should provide a list of solid dividend payers with enough margin of error to avoid having to cut the payout.

Here are the results:

Stock	Dividend Yield	Payout Ratio
Pacer International (PACR)	5.70%	30.1%
Meredith (MDP)	4.70%	31.9%
Rockwell Automation (ROK)	4.50%	27.9%
Emerson Electric (EMR)	4.10%	39.0%
HerbalLife (HLF)	4.00%	21.5%
American Eagle Outfitters (AEO)	3.90%	24.3%
Intel (INTC)	3.80%	40.7%
Northrup Grumman (NOC)	3.60%	30.2%
McGraw-Hill Companies (MHP)	3.50%	33.7%
Boeing (BA)	3.40%	30.9%
Innophos Holdings (IPHS)	3.40%	9.9%

All of these companies look attractive on a dividend yield basis, and seem to have some margin of error to maintain their dividend payments. And, of course, since they are Magic Formula stocks, we expect them to be good companies as they generate high returns on invested capital. However, this should be taken as a starting point. The payout ratio is calculated against net earnings, which can occasionally contain one-time gains and other non-repeatable factors. Also, you want to be sure that these companies have strong balance sheets and that their high return on capital is sustainable, even through down periods. These are things I examine and report on for MagicDiligence members.

Disclosure: Steve owns MHP.

Comments

[BlueOkie:]

Thought there might be some banks and utilities on the list. Liquidity will become a issue as companies hold onto cash.

2008 Nov 11 08:35 AM

[Steve Alexa...:]

> Thought there might be some banks and utilities on the list. Liquidity
> will become a issue as companies hold onto cash.

The Magic Formula strategy by design filters out both banks and utilities. You are right about liquidity, but I see that more as a impediment to increasing the dividend than a risk of it being cut.

2008 Nov 11 09:36 AM

[unimpressed...:]

If these are the most attractive dividend stocks in the market, today, I will take money out of stocks and mutual funds and put it into CD's and high interest MM's. At least, my investments will be safe from turmoil and the return will be satisfying and secure.

2008 Nov 11 02:32 PM

[User 232593:]

not enough yield for the risk. bank cd's @ 4.25% are better at this time.now if you want yield try FRO & NAT. just buy 200 sh of each.that limits the risk.

2008 Nov 11 02:44 PM

[Mark Matson:]

Shame on you - anyone who knows anything about investing understands that there is no magic formula for stock picking. To make matters worse, every serious academic study shows stock picking is a failed method of investing. Even the great Benjamin Graham recanted on his death bed saying paraphrased that markets are efficient and stock picking is gambling. Articles like this encourage investors to overweight their portfolios in individual holdings. Stock picking of any kind is speculating and gambling. Wake up, you do the investor a huge disservice. -Mark Matson

2008 Nov 12 03:40 PM

[Aristides C...:]

hahahahahahah. rofl! dude, the people who think the markets are efficient are the ones who don't exploit the inefficiencies. :-)

"every serious academic study..." ? what planet are you on? have you read a finance journal in the last 5 years?

passive indexing, to the extent that it works at all which is not that well, only works due to the efforts of those who work to actively discover prices.

keep indexing; I'll settle for my incentive allocation :-)


On Nov 12 03:40 PM Mark Matson wrote:

> Shame on you - anyone who knows anything about investing understands
> that there is no magic formula for stock picking. To make matters
> worse, every serious academic study shows stock picking is a failed
> method of investing. Even the great Benjamin Graham recanted on his
> death bed saying paraphrased that markets are efficient and stock
> picking is gambling. Articles like this encourage investors to overweight
> their portfolios in individual holdings. Stock picking of any kind
> is speculating and gambling. Wake up, you do the investor a huge
> disservice. -Mark Matson

2008 Nov 24 09:34 PM

[Aristides C...:]

I like Citigroup preferred. They give you a large number dividend, and Uncle Sam makes it magic!

2008 Nov 24 09:37 PM