Do you prefer stocks that pay handsome dividend income? We researched companies with a dividend yield above 3% and sustainable payout ratios below 50%.
Dividend income investment ideas are only important if the long-term payout is predictable, and we are comfortable with the future profitability of the company.
With that in mind, we further analyzed our list of companies for profitability by performing DuPont analysis on the names. DuPont analysis, also known as "DuPont identity" was started by the DuPont Corporation in the 1920s. Here, assets are measured at their gross book value rather than at net book value in order to produce a higher return on equity (ROE). If the ROE is unsatisfactory, the DuPont analysis helps target the part of the business that is underperforming.
DuPont analyzes profitability by breaking up return on equity (net income/equity) into three components:
= (Net Profit/Equity)
= (Net profit/Sales)*(Sales/Assets)*(Assets/Equity)
= (Net Profit margin)*(Asset turnover)*(Leverage ratio)
Because increases in net margin and asset turnover are considered good things, DuPont focuses on companies with these positive characteristics:
- Increasing ROE
- Decreasing leverage, (i.e. decreasing Asset/Equity ratio)
- Improving asset use efficiency (i.e. increasing Sales/Assets ratio) and improving net profit margin (i.e. increasing Net Income/Sales ratio)
Those companies that pass DuPont are seeing positive trends in the sources of their increasing profitability, which adds further weight to the idea that the names are profitable.
A Closer Look
For the benefit of our readers, we decided to do a detailed analysis on Ingles Markets (IMKTA). As of September 29th, 2013, the company has a total of $785 million in total debt. The table below provides details from the company's 10-K.
The company has a line of credit facility of $175 million of which there was $40.1 million outstanding at September 29, 2012. The Company is in compliance with all of its debt agreements.
Fiscal year 2012 was Ingles' 48th consecutive year of record sales. The number of customer transactions increased 1.5%, and the average transaction size increased by $0.07.
Although the company competes with Wal-Mart (WMT), Target (TGT), and The Kroger Co. (KR), it believes that its competitive advantages include convenient locations, the quality of service, and competitive pricing.
Here is a company with solid fundamentals including a good credit profile. Does the 3.4% dividend entice you to take the investment risk?
For an interactive version of this chart, click on the image below. Analyst ratings sourced from Zacks Investment Research.
1. Belo Corp. (BLC): Operates as a television company.
- Market cap at $796.1M, most recent closing price at $8.67. Dividend yield at 3.69%, and payout ratio at 37%.
- MRQ net profit margin at 14.08% vs. 9.02% y/y. MRQ sales/assets at 0.106 vs. 0.096 y/y. MRQ assets/equity at 5.409 vs. 5.749 y/y.
2. Dr Pepper Snapple Group, Inc. (DPS): Engages in the manufacture and distribution of non-alcoholic beverages in the United States, Canada, and Mexico.
- Market cap at $9.38B, most recent closing price at $45.24. Dividend yield at 3%, and payout ratio at 45%.
- MRQ net profit margin at 11.71% vs. 10.07% y/y. MRQ sales/assets at 0.17 vs. 0.166 y/y. MRQ assets/equity at 3.878 vs. 4.073 y/y.
3. Ingles Markets Inc. : Operates a supermarket chain in the southeast United States.
- Market cap at $465.55M, most recent closing price at $19.62. Dividend yield at 3.4%, and payout ratio at 35%.
- MRQ net profit margin at 1.34% vs. 1.21% y/y. MRQ sales/assets at 0.604 vs. 0.56 y/y. MRQ assets/equity at 3.59 vs. 3.747 y/y.
4. Main Street Capital Corporation (MAIN): Specializes in equity, equity related, and debt investments in small and lower middle market companies.
- Market cap at $1.01B, most recent closing price at $32.29. Dividend yield at 5.57%, and payout ratio at 47%.
- MRQ net profit margin at 139.3% vs. 84.49% y/y. MRQ sales/assets at 0.026 vs. 0.026 y/y. MRQ assets/equity at 1.576 vs. 1.979 y/y.
5. Sunoco Logistics Partners L.P. (SXL): Engages in the transport, terminalling, and storage of refined products and crude oil, as well as the purchase and sale of crude oil in the United States.
- Market cap at $6.28B, most recent closing price at $61.16. Dividend yield at 3.38%, and payout ratio at 45%.
- MRQ net profit margin at 4.16% vs. 3.33% y/y. MRQ sales/assets at 0.594 vs. 0.515 y/y. MRQ assets/equity at 4.241 vs. 5.116 y/y.
6. Valassis Communications Inc. (VCI): Operates as a media and marketing services company primarily in the United States.
- Market cap at $1.1B, most recent closing price at $28.75. Dividend yield at 4.3%, and payout ratio at 0%.
- MRQ net profit margin at 7.01% vs. 5.2% y/y. MRQ sales/assets at 0.333 vs. 0.324 y/y. MRQ assets/equity at 3.385 vs. 3.497 y/y.
*Profitability data sourced from Finviz, all other data sourced from Finviz.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.