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Do you prefer stocks that pay handsome - and reliable- dividend income? To create the list below we researched companies with a dividend yield between 2%-5%, and sustainable payout ratios below 50%. This allowed us to avoid high yield names with potentially unsustainable payouts.

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.

We further analyzed our list of companies for strong profitability by performing DuPont analysis. DuPont analyzes profitability by breaking up return on equity (net income/equity) into three components. If the ROE is unsatisfactory, the DuPont analysis helps target the part of the business that is underperforming. Learn more about the equation here.

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.

Our final list consisted of 5 stocks.

A Closer Look

We looked at The Men's Warehouse (NYSE:MW) in more detail. The stock is trading around $29.24 versus its 52-week high of $40.67, down 25% in the past 1-year. The stock trades with a P/E multiple of 11.5 times versus the industry average of 13 times. The company's closest competitors are Brooks Brothers, Burlington Coat Factory, and Jos. A. Bank Clothiers, which are privately held.

Turning to the balance sheet, the company has cash and cash equivalents of $125 million, and zero public debt. For the nine months ended October 2012, the company generated $77 million in free cash flow. To add to the liquidity cushion, Men's Warehouse has a $200 million credit facility. As off October 2012, there were no borrowings outstanding under the facility.

The company remains dedicated to returning cash to shareholders in the form of share-buybacks, and dividend payments. Additionally, gross margins continue to improve with 46.1% end of quarter October 27th, 2012 versus 45.9% in quarter ended October 27th, 2011.

Do you think Men's Warehouse will continue to outperform?

The List

For an interactive version of this chart, click on the image below.

Do you think these dividend stocks are attractive? Use this as a starting-off point for your own analysis.

1. American States Water Company (NYSE:AWR): Provides water, electric, and contracted services in the United States.

  • Market cap at $1.06B, most recent closing price at $54.91.
  • MRQ net profit margin at 9.15% vs. 6.98% y/y. MRQ sales/assets at 0.088 vs. 0.078 y/y. MRQ assets/equity at 2.818 vs. 3.03 y/y.
  • Dividend yield at 2.6%, and payout ratio at 45%.

2. Destination Maternity Corporation (NASDAQ:DEST): Engages in the design and retail of maternity apparel.

  • Market cap at $302.04M, most recent closing price at $22.98.
  • MRQ net profit margin at 2.84% vs. 1.66% y/y. MRQ sales/assets at 0.707 vs. 0.7 y/y. MRQ assets/equity at 1.782 vs. 2.09 y/y.
  • Dividend yield at 3%, and payout ratio at 45%.

3. Dr Pepper Snapple Group, Inc. (NYSE:DPS): Engages in the manufacture and distribution of non-alcoholic beverages in the United States, Canada, and Mexico.

  • Market cap at $8.99B, most recent closing price at $44.39.
  • MRQ net profit margin at 11.46% vs. 11.36% y/y. MRQ sales/assets at 0.166 vs. 0.157 y/y. MRQ assets/equity at 3.916 vs. 4.102 y/y.
  • Dividend yield at 3.4%, and payout ratio at 45%.

4. Kansas City Life Insurance Company (NASDAQ:KCLI): Operates as a financial services company that primarily focuses on the sale and administration of life and annuity insurance products in the United States.

  • Market cap at $418.04M, most recent closing price at $37.91.
  • MRQ net profit margin at 7.25% vs. 5.51% y/y. MRQ sales/assets at 0.024 vs. 0.024 y/y. MRQ assets/equity at 6.031 vs. 6.189 y/y.
  • Dividend yield at 2.9%, and payout ratio at 38%.

5. The Men's Wearhouse, Inc. : Operates as a specialty retailer of men's suits in the United States and Canada.

  • Market cap at $1.5B, most recent closing price at $29.17.
  • MRQ net profit margin at 7.74% vs. 6.82% y/y. MRQ sales/assets at 0.411 vs. 0.405 y/y. MRQ assets/equity at 1.388 vs. 1.402 y/y.
  • Dividend yield at 2.5%, and payout ratio at 29%.

*Profitability data sourced from Finviz, all other data sourced from Finviz.

Source: 5 Small And Mid Cap Dividend Stocks With Sustainable Payouts And Strong Sources Of Profitability