Six Solid Dividend Payers That Look Attractive

Regular readers of my blog know I place a premium on cash yields on my portfolio. But this emphasis on dividends has gotten me into trouble in the past. Yes, I'll say it: "My name is Davy Bui and I am a recovering yield pig."

My past experiences with stocks like American Capital (ACAS) and Penn West Energy Trust (PWE) have led me to focus more keenly on the sustainability of a dividend and not let the high yield blind me to problem areas. Also, following up on my last post on the market's prospects going forward, prudent, long-term investors may want to consider building a portfolio of reliable dividend plays to generate return if we suffer through a prolonged down or sideways market. As such, my latest screen honed on these stocks using the following criteria:

• Dividend Yields > 2%
• Payout Ratio Below Industry Average
• ROA > 10%

The first requirement speaks for itself: we're looking to get paid to hold through an uncertain market. Requiring a low payout ratio should give us a list of companies with an ability to continue paying (and raising) their dividends even if my prediction of weaker economic trends is correct. We are looking for companies who can pay dividends because the business generates profits and cash. Companies who pay up to (or even over) 100% of their net income can not keep it up for long without borrowing money or otherwise harming the business or shareholders.

Finally, we add a high ROA requirement to try to weed out weaker companies who may not have a strong enough business model to sustain through a severe downturn. This screen generated 32 names:

• MMM 3M Company
• AZN AstraZeneca plc (ADR)
• ATNI Atlantic Tele-Network, Inc.
• CPB Campbell Soup Company
• CCF Chase Corporation
• CHH Choice Hotels International, Inc.
• CMP Compass Minerals International, Inc.
• EPB El Paso Pipeline Partners, L.P.
• EMR Emerson Electric Co.
• ECA EnCana Corporation (USA)
• FLO Flowers Foods, Inc.
• HLF Herbalife Ltd.
• HWCC Houston Wire & Cable Company
• IPHS Innophos Holdings, Inc.
• JNJ Johnson & Johnson
• LO Lorillard Inc.
• NSM National Semiconductor Corporation
• NVS Novartis AG (ADR)
• NTRI NutriSystem Inc.
• PEP PepsiCo, Inc.
• TLK PT Telekomunikasi Indonesia (ADR)
• RHHBY Roche Holding Ltd. (ADR)
• COL Rockwell Collins, Inc.
• TMX Telefonos de Mexico, S.A. (ADR)
• TS Tenaris S.A. (ADR)
• TXNTexas Instruments Incorporated
• WTW Weight Watchers International, Inc.
• WES Western Gas Partners, LP
• WMZ Williams Pipeline Partners L.P.
• WWW Wolverine World Wide, Inc.
• WYE Wyeth
• YUM Yum! Brands, Inc.

In an effort to whittle down the list, and ever wary of a pending market correction, I further narrowed the list to those stocks within 30% of their 52-week low, which left six stocks: CPB, FLO, TS, IPHS, NVS, TMX. I ran a rough cash flow valuation on the stocks using numbers from Gridstone Research, Google Finance and Yahoo! Finance. Readers can view the results here on this spreadsheet.

Only IPHS and NVS seem to be candidates for further research. Keep in mind that one only gets a very rough and possibly incomplete picture with this sort of number-crunching. Investors should use this screen and spreadsheet as a possible starting point, nothing more.

View the spreadsheet for solid dividend payers lagging the market rally.

Comments

[David Van K...:]

Nice start. Hope your recovery is going well. I'm glad you recognized the disease...lots of people never do.

To me, dividend investing is its own goal...not a consolation prize while you wait for the market to go back up. Dividend investing is a specific strategy, significantly different from investing for capital appreciation.

If collecting dividends is its own goal, then a higher initial payout than 2% makes more sense...I use 3% (eased to 2.5% for stocks that have an uninterrupted streak of 20 or more years of increasing dividends each year). The ROA > 10% screen is fine. But I don't understand the payout ratio < industry average screen. Every company must be analyzed on its own merits. Low payout ratios are one way (not necessarily the best) of identifying companies whose dividends are not in jeopardy. But why "less than the industry average"? That just seems like it's convenient. I'd recommend a stock-by-stock financial analysis to determine whether the company can not only support its dividend but raise it consistently.

Jun 15 08:51 AM

[YoYoMama:]

IPHS is an intriguing company, but the time to have jumped on that stock was late March, when the price was under $10 and the yield was over 6%. The stock looks like it may take a downturn now. I would wait.

NVS only pays once a year. The last dividend was in February. That leaves it 9 or so months to announce the next dividend. Personally I'm always uncomfortable investing in a 1x divy so early. I would wait.

Why shoot for only 2%? An igosavings.com account pays 3%, and I can withdraw my money and deposit without penalty or cost. Better to shoot for minimum of 3% yield that can beat a high yield savings account.

Jun 15 08:58 AM

[User 117003:]

Several weeks ago I started look into PREFERRED issues of stocks that fell in March. My arbitrary target was 10% return on the current price of the preferred stock. Most preferreds are thinly traded. I got mostly banks & residential REITs, plus a bunch of others that I thought would hang in there.

Jun 15 10:38 AM

[Lightway:]

igosavings.com goes to a squatter page. Is there another link you meant? Thanks.


On Jun 15 08:58 AM YoYoMama wrote:

> IPHS is an intriguing company, but the time to have jumped on that
> stock was late March, when the price was under $10 and the yield
> was over 6%. The stock looks like it may take a downturn now. I
> would wait.
>
> NVS only pays once a year. The last dividend was in February. That
> leaves it 9 or so months to announce the next dividend. Personally
> I'm always uncomfortable investing in a 1x divy so early. I would
> wait.
>
> Why shoot for only 2%? An igosavings.com account pays 3%, and I
> can withdraw my money and deposit without penalty or cost. Better
> to shoot for minimum of 3% yield that can beat a high yield savings
> account.

Jun 15 01:01 PM

[YoYoMama:]

Sorry about that. Try: www.igobanking.com/hom.... The passbook savings rate is now 2%. It is a variable rate, it can range up to 3+%.


On Jun 15 01:01 PM Lightway wrote:

> igosavings.com goes to a squatter page. Is there another link you
> meant? Thanks.

Jun 16 06:05 PM