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Do you prefer stocks that offer both reliable dividend income and the real possibility of capital gains? You might be interested in our list below:

To create our stock list, we looked at low debt dividend stocks with a yield between 1% and 5% (to avoid unsustainable yields) that appear undervalued relative to their cash flows, indicated by high ratios of levered free cash flow/enterprise value.

Levered free cash flow is the free cash flow after deducting interest payments on outstanding debt. Enterprise value is the sum of the firm's value from all ownership sources: market cap, outstanding debt, and preferred shares. When companies have ratios of levered free cash flow/enterprise value in excess of 10%, it may indicate that the company as a whole is being undervalued.

This ratio gives us the money that the business can use to grow and pay dividends to shareholders. Any possibility of a dividend payout nowadays is looked at positively.

In screening for low debt we looked for companies with a debt-to-equity ratio of less than 0.1. When we analyzed the balance sheet we focused on the total debt of the company instead of only long-term debt. This allowed us to focus on strong credit quality companies.

Finally, we researched those stocks with strong sales trends, comparing growth in revenue to growth in accounts receivable. Since accounts receivable is the portion of revenue not yet received, and there is no guarantee the money will ever be received, the smaller the portion of revenue made up of receivables, the healthier the company's revenue.

We screened for stocks seeing faster growth in revenue than accounts receivable year-over-year, as well as accounts receivable comprising a smaller portion of current assets over the same time period.

The List

Our analysis of the financials left us 3 dividend stocks undervalued by levered free cash flow with debt-to-equity of less than 0.1, and encouraging sales trends.

Interactive Chart: Press Play to compare changes in monthly return for the stocks mentioned below. Analyst ratings sourced from Zacks Investment Research.

Do you think these stocks should be added to your portfolio? Use the list below as a starting point for your analysis:

1. Activision Blizzard, Inc. (ATVI): Publishes online, personal computer (PC), console, handheld, and mobile games of interactive entertainment worldwide.

  • Market cap at $16.17B, most recent closing price at $14.43.
  • Levered free cash flow at $1.34B vs. enterprise value at $11.60B (implies a LFCF/EV ratio at 11.55%).
  • Revenue grew by 25.75% during the most recent quarter ($1,768M vs. $1,406M y/y). Accounts receivable grew by 8.94% during the same time period ($707M vs. $649M y/y). Receivables, as a percentage of current assets, decreased from 12.06% to 11.27% during the most recent quarter (comparing 3 months ending 2012-12-31 to 3 months ending 2011-12-31).
  • Dividend yield at 1.3%. Debt-to-equity at 0.

2. Duff & Phelps Corporation (DUF): Provides independent financial advisory and investment banking services worldwide.

  • Market cap at $654.32M, most recent closing price at $15.53.
  • Levered free cash flow at $72.78M vs. enterprise value at $611.55M (implies a LFCF/EV ratio at 11.9%).
  • Revenue grew by 16.52% during the most recent quarter ($145.13M vs. $124.55M y/y). Accounts receivable grew by 3.33% during the same time period ($133.52M vs. $129.22M y/y). Receivables, as a percentage of current assets, decreased from 72.19% to 62.09% during the most recent quarter (comparing 3 months ending 2012-12-31 to 3 months ending 2011-12-31).
  • Dividend yield at 2.3%. Debt-to-equity at 0.06.

3. National Presto Industries Inc. (NPK): Engages in the production and sale of housewares/small appliances, defense products, and absorbent products in North America.

  • Market cap at $538.32M, most recent closing price at $77.70.
  • Levered free cash flow at $46.44M vs. enterprise value at $458.16M (implies a LFCF/EV ratio at 10.14%).
  • Revenue grew by 11.4% during the most recent quarter ($116.81M vs. $104.86M y/y). Accounts receivable grew by 0.33% during the same time period ($69.88M vs. $69.65M y/y). Receivables, as a percentage of current assets, decreased from 22.86% to 22.84% during the most recent quarter (comparing 3 months ending 2012-09-30 to 3 months ending 2011-10-02).
  • Dividend yield at 1.3%. Debt-to-equity at 0.

*Price data sourced from Yahoo! Finance, all other data sourced from Finviz.

Source: 3 Undervalued Low-Debt Dividend Stocks With Encouraging Sales Trends