Many materials companies pay dividends. Among the 191 materials companies that are included in the Russell 3000 index, 119 companies pay dividends. The average annual dividend yield of these companies is 2.58% while the median is 2.09%. PetroLogistics LP (NYSE:PDH) has the highest yield at 21.88%, and Vulcan Materials Co (NYSE:VMC) has the lowest yield at 0.07%.
In this article, I tried to determine which of the Russell 3000 materials companies is the most attractive for dividend-seeking investors.
I consider that besides healthy dividend yield, low payout ratio and consistent dividend growth are the most crucial factors for dividend-seeking investors. In addition, since dividend investors try to avoid too much risk, The Sharpe ratio, which measures the ratio of reward to risk, is also extremely important.
I have screened the Russell 3000 materials companies that pay dividends according the above-mentioned principles.
The screen's method requires all stocks to comply with all following demands:
- The payout ratio is less than 100%.
- The annual rate of dividend growth over the past five years is greater than zero.
- The forward dividend rate is equal or greater than the trailing dividend rate.
- Sharpe ratio is greater than 1.0.
Furthermore, I ranked all the stocks that complied with all the required demands according to a formula that I constructed, which gave 35% weight to the yield, 35% to the payout ratio, 20% to the dividend growth and 10% to the Sharpe ratio.
In order to find out how such a ranking formula would have performed during the last 14 years, I ran a back-test, which is available by the Portfolio123's screener. For the back-test, I took the 406 Russell 3000 companies that pay dividends and comply with all the above-mentioned demands.
The back-test results are shown in the chart below. For the back-test, I divided the 406 companies into 10 groups according to their ranking. The highest ranked group with the ranking score of 90-100, which is shown by the dark green column in the chart, has given by far the best return, an average annual return of almost 21%. Also, the second and the third group (scored: 80-90 and 70-80) have given superior returns. This brings me to the conclusion that my ranking system is useful.
I used the Portfolio123's powerful screener and ranking system to perform the search. All the data for this article were taken from Portfolio123. After running this screen on June 12, 2013, I discovered 38 materials stocks, which comply with all the demands.
The table below presents the best 20 companies in the order of their rank.
The table below presents the dividend yield, the payout ratio, the annual rate of dividend growth over the past five years and the Sharpe ratio for the 20 companies.
The table below shows the most influential parameters, for dividend-seeking investors, for the six best ranked Russell 3000 materials companies according to my criteria.
Which of the six materials companies is the most attractive for dividend-seeking investors? It is not easy to determine. All the six stocks look quite attractive to dividend-seeking investors due to their solid dividend and their long-term track record of consistent and rising dividend payments. Schweitzer-Mauduit Intl Inc (NYSE:SWM) has a good yield of 2.43% and all its valuation parameters are good. Rock-Tenn Co (NYSE:RKT) has the highest Sharpe ratio among the six companies at 3.28, but it has the lowest yield at 1.17%. Reliance Steel & Aluminum Co (NYSE:RS) has the lowest price to free cash flow among the six companies at 10.79, but its dividend yield is only 1.83%. Neenah Paper Inc (NYSE:NP) has a good yield of 2.51%, but its price to free cash flow is very high at 229. Kaiser Aluminum Corp (NASDAQ:KALU) has good earnings growth prospects, but its dividend yield is only 1.89%. Steel Dynamics Inc (NASDAQ:STLD) has the highest yields among the six companies at 2.96, but its payout ratio is the highest at 53%.
Considering all these factors, I can't see one stock, which is clearly superior to the others. In my opinion, a portfolio of the three stocks: SWM, NP and STLD can give a satisfying long-term return to the dividend investor.