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Arie Goren, Portfolio123 (475 clicks)
Long only, value, research analyst, dividend investing
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The payout ratio is the percentage of a company's earnings paid out to investors as cash dividends. The lower is the payout ratio, the more secure is the dividend because smaller dividends are easier to pay out than larger dividends.

I have searched for very profitable companies that pay rich dividends and have a low payout ratio. I also looked for companies where the average analysts' recommendation is a strong buy, and which are in a short-term uptrend, in a mid-term uptrend and in a long-term uptrend. Stocks in an uptrend are performing well and are in a buying mode.

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 the following criteria:

1. Trailing P/E is less than 12.

2. Forward P/E is less than 14.

3. Dividend yield is greater than 3%.

4. The payout ratio is less than 35%.

5. Average analyst recommendations are very bullish (equal or less than 1.50).

6. Stock price is above 20-day simple moving average (short-term uptrend).

7. Stock price is above 50-day simple moving average (mid-term uptrend).

8. Stock price is above 200-day simple moving average (long-term uptrend).

After running this screen on January 4, 2013 before the market open, I obtained as results the 4 following stocks:

(click images to enlarge)

BT Group plc (BT)

BT Group plc provides communications solutions and services worldwide. BT Group plc was founded in 1981 and is based in London, the United Kingdom.

BT Group has a very low trailing P/E of 9.09, and a very low forward P/E of 9.69. The PEG ratio is at 1.96. The forward annual dividend yield is very high at 3.62%, and the payout ratio is only 32%. The stock is trading 1.39% below its 52-week high, and has 22.5% upside potential based on the consensus mean target price of $47.02. Analysts recommend the stock (here) -- the two analysts covering the stock are rating it as a strong buy and as a buy. The stock price is 1.44% above its 20-day simple moving average, 5.58% above its 50-day simple moving average and 12.28% above its 200-day simple moving average, which indicates short-term, mid-term and long-term uptrend. On November 1, 2012, BT Group reported its financial results for the second quarter and half year to September 30, 2012, (here). In the report, Ian Livingston, Chief Executive, commenting on the results, said:

We have delivered another solid quarter of growth in profit before tax despite the economic conditions and regulatory impacts. We continue to make significant investments in the future of our business and we are again accelerating our fibre roll-out. We now expect fibre to be available to two-thirds of UK premises during spring 2014, more than 18 months ahead of our original schedule, and we are recruiting more than 1,000 engineers in 2012 to help deliver this.

The cheap valuation, the strong analysts' recommendation, the fact that the stock is in an uptrend and the rich dividend are all factors that make BT stock quite attractive.

Chart: finviz.com

Deluxe Corp. (DLX)

Deluxe Corporation, together with its subsidiaries, provides printed products, forms, and marketing solutions to small businesses and financial institutions primarily in the United States, Canada, Europe, and South America.

Deluxe Corporation has a very low trailing P/E of 9.99, and an even lower forward P/E of 9.02. The PEG ratio is at 1.60. The price to free cash flow for the trailing 12 months is very low at 10.52, and the average annual earnings growth estimates for the next five years is at 6.25%. The forward annual dividend yield is quite high at 3.07%, and the payout ratio is only 30.5%. Analysts recommend the stock (here) -- among the three analysts covering the stock, two rate it as a strong buy and one rates it as a buy. The stock is trading 1.93% below its 52-week high, and has 13.6% upside potential based on the consensus mean target price of $37.00. The stock price is 4.99% above its 20-day simple moving average, 7.54% above its 50-day simple moving average and 21.56% above its 200-day simple moving average, which indicates short-term, mid-term and long-term uptrend.

On January 24, Deluxe Corporation will report its latest quarterly financial results. DLX is expected to post a profit of $0.87 a share (here), a 4.8% rise from the company's actual earnings for the same quarter a year ago. The reported results will probably affect the stock price in the short term.

Chart: finviz.com

Homeowners Choice, Inc. (HCI)

Homeowners Choice, Inc., an insurance holding company, provides property and casualty insurance in Florida.

Homeowners Choice has no debt at all, and it has a very low trailing P/E of 8.70. It also has an even lower forward P/E of 7.21. The price to free cash flow for the trailing 12 months is very low at 3.40. The forward annual dividend yield is quite high at 4.03%, and the payout ratio is only 28.8%. The company is trading 14.61% below its 52-week high, and has 15.6% upside potential based on the consensus mean target price of $25.78. Analysts recommend the stock (here) -- all three analysts covering the stock rate it as a strong buy. The stock price is 7.42% above its 20-day simple moving average, 6.07% above its 50-day simple moving average and 23.39% above its 200-day simple moving average. On November 6, 2012, Homeowners Choice reported its 3Q financial results (here). In that announcement, Paresh Patel, Homeowners Choice Chairman and Chief Executive Officer, said:

We are pleased to report strong quarterly and nine-month results despite the impact of tropical storms that occurred in June and August 2012. We believe we have strong momentum to carry us forward into 2013 and we look forward to continuing profitable growth.

The compelling valuation metrics, the rich dividend, the strong analysts' recommendation and the 15.6% upside potential based on the consensus mean target price of $25.78 are all factors that make HCI stock quite attractive.

Chart: finviz.com

Northrim BanCorp Inc. (NRIM)

Northrim BanCorp, Inc. operates as the bank holding company for Northrim Bank that provides commercial banking products and services to businesses, professionals, and individuals primarily in Alaska.

Northrim BanCorp has quite a low debt (total debt to equity is 0.34), and it has a very low trailing P/E of 11.43. It also has a low forward P/E of 13.23. The forward annual dividend yield is at 2.60%, and the payout ratio is only 27.2%. Analysts recommend the stock (here) -- the two analysts covering the stock are rating it as a strong buy and as a buy. The stock price is 3.18% above its 20-day simple moving average, 5.68% above its 50-day simple moving average and 7.72% above its 200-day simple moving average.

Northrim BanCorp will report its latest quarterly financial results on January 22. NRIM is expected to post a profit of $0.45 a share (here), a 10% decline from the company's actual earnings for the same quarter a year ago. The reported results will probably affect the stock price in the short term.

Chart: finviz.com

Source: 4 High-Yielding Dividend Stocks With A Low Payout Ratio That Analysts Strongly Recommend