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, Portfolio123 (1,583 clicks)
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Investing in companies that regularly raise dividends provides security in an uncertain market and means higher returns ahead. I have searched for very profitable companies that pay rich dividends and that raise their payouts significantly each year. I also looked for companies which have very low debt.

I have elaborated a screening method, which shows stock candidates following these lines. Nonetheless, the screening method should only serve as a basis for further research.

The screen's formula requires all stocks to comply with all following demands:

1. The stock is included in the Russell 3000 index. Russell Investment explanation:

The Russell 3000 Index measures the performance of the largest 3000 U.S. companies representing approximately 98% of the investable U.S. equity market. The Russell 3000 Index is constructed to provide a comprehensive, unbiased, and stable barometer of the broad market and is completely reconstituted annually to ensure new and growing equities are reflected.

2. Price to free cash flow is less than 13, (many investors prefer using free cash flow instead of net income to measure a company's financial performance, because free cash flow is more difficult to manipulate. Free cash flow is the operating cash flow minus capital expenditure).

3. Trailing P/E is less than 15.

4. Forward P/E is less than 15.

5. Dividend yield is greater than 3.0%.

6. Annual rate of dividend growth over the past five years is greater than 10%.

7. Debt to equity is less than 0.40.

After running this screen on December 27, 2012, before the market open, I obtained as results the 5 following stocks:

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CompanySymbolLast Quarter Dividend (cents)Year Ago Dividend (cents)Change
CA TechnologiesCA255400%
KLA-Tencor CorporationKLAC403514%
Microsoft CorporationMSFT232015%
Northrop GrummanNOC555010%
Safety Insurance GroupSAFT605020%

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CA Technologies (NASDAQ:CA)

CA Technologies, together with its subsidiaries, provides enterprise information technology management software and solutions in the United States and internationally.

CA Technologies has a very low debt (total debt to equity is only 0.24) and it has a low trailing P/E of 11.22 and even a lower forward P/E of 8.60, the PEG ratio is at 1.25. The average annual earnings growth for the past 5 years was very high at 53.77% and the average annual earnings growth estimates for the next 5 years is at 9.0%. The price to free cash flow for the trailing 12 months is very low at 12.22. The forward annual dividend yield is very high at 4.52% and the payout ratio is at 39.9%. The company is trading 18.91% below its 52-week high and has 19.4% upside potential based on the consensus mean target price of $26.40. CA Technologies will report its latest quarterly financial results on Tuesday, January 22, 2013. CA is expected to post a profit of $0.61 a share (here), a decline of 6.2% from the company's actual earnings for the same quarter a year ago. The reported results will probably affect the short-term stock price.

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Chart: finviz.com

KLA-Tencor Corporation (NASDAQ:KLAC)

KLA-Tencor Corporation designs, manufactures, and markets process control and yield management solutions for the semiconductor and related nanoelectronics industries.

KLA-Tencor has a very low debt (total debt to equity is only 0.22) and it has a low trailing P/E of 11.57 and a low forward P/E of 11.89, the PEG ratio is at 1.16. The average annual earnings growth for the past 5 years was at 11.21% and the average annual earnings growth estimates for the next 5 years is at 10%. The price to free cash flow for the trailing 12 months is very low at 12.02 and the current ratio is very high at 5.26. The forward annual dividend yield is at 3.36% and the payout ratio is only 34.6%. The company is trading 11.94% below its 52-week high and has 12% upside potential based on the consensus mean target price of $53.44. The cheap valuation and the rich dividend; all these factors make the KLAC stock quite attractive.

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Chart: finviz.com

Microsoft Corporation (NASDAQ:MSFT)

Microsoft has a very low debt (total debt to equity is only 0.17) and it has a low trailing P/E of 14.52 and a very low forward P/E of 8.37, the PEG ratio is at 1.51. The average annual earnings growth for the past 5 years was at 7.01% and the average annual earnings growth estimates for the next 5 years is at 9.59%. The price to free cash flow for the trailing 12 months is very low at 10.08. The forward annual dividend yield is at 3.43% and the payout ratio is at 44.4%. The company is trading 16.72% below its 52-week high and has 28% upside potential based on the consensus mean target price of $34.44. Most analysts recommend the stock-- among the 40 analysts covering the stock, 27 analysts rate it as a strong buy or as a buy and 13 analysts rate it as a hold. The compelling valuation metrics, the rich dividend, the analyst's recommendation, the 28% upside potential based on the consensus mean target price of $34.44 and the fact that Microsoft is a global leader are all factors that make MSFT stock a bargain right now.

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Chart: finviz.com

Northrop Grumman Corporation (NYSE:NOC)

Northrop Grumman Corporation provides products, services, and solutions in aerospace, electronics, information systems, and technical services worldwide.

Northrop Grumman has a low debt (total debt to equity is only 0.36) and it has a very low trailing P/E of 8.77 and a very low forward P/E of 9.76. The average annual earnings growth for the past 5 years was at 10.44% and the average annual earnings growth estimates for the next 5 years is at 4.03%. The price to free cash flow for the trailing 12 months is very low at 8.29. The forward annual dividend yield is at 3.23% and the payout ratio is only 26.8%. The stock price is 0.94% above its 20-day simple moving average, 1.30% above its 50-day simple moving average and 6.97% above its 200-day simple moving average, which indicates short-term, mid-term and long-term uptrend. The cheap valuation, the rich dividend and the fact that the NOC stock is in an uptrend ; all these factors make the NOC stock quite attractive.

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Chart: finviz.com

Safety Insurance Group Inc. (NASDAQ:SAFT)

Safety Insurance Group, Inc., through its subsidiaries, provides private passenger automobile insurance products primarily in Massachusetts and New Hampshire.

Safety Insurance has no debt at all and it has a low trailing P/E of 13.15 and a low forward P/E of 14.81. The price to free cash flow for the trailing 12 months is very low at 11.86 and the average annual earnings growth estimates for the next 5 years is quite high at 15%. The forward annual dividend yield is very high at 5.23% and the payout ratio is at 60.2%. The stock price is 0.98% above its 20-day simple moving average, 2.14% above its 50-day simple moving average and 8.26% above its 200-day simple moving average. On November 02, Safety Insurance reported its 3Q financial results (here). Net income for the quarter ended September 30, 2012 was $14.3 million, or $0.94 per diluted share, compared to net income of $8.8 million, or $0.58 per diluted share, for the comparable 2011 period. Safety's book value per share increased to $45.46 at September 30, 2012 from $43.22 at December 31, 2011. Safety paid $0.60 per share in dividends to investors during the quarter ended September 30, 2012, compared to $0.50 per share during the comparable 2011 period. The cheap valuation, the very rich dividend and the fact that the SAFT stock is in an uptrend; all these factors make the SAFT stock quite attractive.

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Chart: finviz.com

Source: 5 Value Stocks With Increasing Dividends