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 (NASDAQ:ACAS) and Penn West Energy Trust (NYSE: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)
- OTCQX: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.