There comes a time when you realize that Fast Money is not always the Best Money especially if you survived the carnage of 2008/2009. With all the volatility presently in the markets - 200 points up, 200 points down on the DJIA and then 200 points up again - when do you buy and when do you sell? For a trader it is challenging enough, but for an investor what can you do?
I asked myself these questions:
1. Which companies survived relatively well in the last 3 years with good profit margins, reasonable levels of debt, ROA, ROE, and pay dividends?
2. What volatility did these companies experience in their share price over the last 52 weeks?
3. What sort of returns could I potentially gain holding these companies medium to long term?
It takes a bit of work and key punching to get all the data you need using the stock screeners from Yahoo and CNBC as well as reading articles on dividends from Fool.com and Investors Place, and after much effort I came up with these Top 5 companies that I am considering or have included in my income earning dividend portfolio using the following screening criteria:
- Mid to Large cap;
- Dividend yield above 3%;
- Profit margin above 10%;
- ROA above 10%;
- ROE above 20% and
- Total Debt to Total Capital ratio below 50% (Total Capital = Total LT Debt + Shareholders Equity).
Note: While I used this criteria to screen, my final selection also considered companies mentioned in the articles and elements for diversification.
1. Johnson & Johnson (JNJ) gives a 3.65% dividend yield paying $2.16 per share annually and is well diversified into consumer heath care products (remember the baby powder?), medical devices and pharmaceuticals.
Johnson & Johnson has profit margins over 20% and low debt ratio under 20%, meaning that they are able to generate good cash flows, not having to devote a lot to paying interest expense because they are not highly leveraged which in turn reduces their risk to bankruptcy due to liquidity concerns.
Their share price is 12% and 8% from the 52-week high and low respectively and if you take a 12 month period, assume that it reaches either of these extremes again and include dividends in your calculation, the impact to your portfolio will be a 15.5% total gain (capital gain + dividend) or 4.2% total loss (capital loss + dividend). Converting this into a ratio for comparison purposes you get 3.72.
2. Coca-cola (KO) is everyone's favorite dividend earning company yielding 3.36%. Again, it has nice profit margins and a good use of assets and capital with responsible use of debt. Similar to Johnson & Johnson, Coca-cola's share price is between the 52-week high 14% and low 10%. Including dividends, a move to the 52-week extremes will provide a 16.9% gain or 6.5% loss, a ratio of 2.59.
3. Southern Copper Corp. (SCCO) yields a whopping 5.93% yield. Nice margins and use of debt. Southern is not as large as Johnson & Johnson or Coca-Cola, but are in a position to benefit from the growth in China with its demand for copper. It is more volatile as you look at the extremes it has hit over the past 52-weeks with a high 22% away and a low 39% away. This risk is reflected in the returns and the ratio 0.83 based on potential gains of 27.7% and loss of 33.3%.
4. Altria Group (MO) is not a 'people' friendly company dealing in 'smokes', but it pays a good dividend of $1.40 per share yielding 7%. It is highly leveraged at 74% total debt/total capital, but is able to service the debt through decent margins of around 20%. Potential 52-week gains here are 16.6% and losses 12.5%. Ratio is 1.33. If you want alternatives, try ExxonMobil (XOM) or American Eagle Outfitters (AEO).
5. Abbott Labs (ABT) is a 'people' friendly company, working to make people's health better, yields 3.62%. As a pharmaceutical company, it needs to make decent margins 16% to fund further R&D which it does and also has to make use of more debt as well 45%. Overall, it has to move 17% to get to its 52-week high or 11% low for a potential gain 20.4% or loss 7.0% with a ratio of 2.90.
Table: Top 5 Quality Dividend Paying Companies
|Company||Ann. Div||DY%||Profit Margin %||ROA %||ROE %||Debt/ Cap%||52W H %||52W L %||Ratio|
Use this article as a starting point to investigate these companies further before making any decisions which has been my approach. The criteria I use has helped me to make an informed decision and serve as reference points. Share prices or the company's performance may or may not reach the same levels as in the past.
1. Tax considerations have not been included in this analysis. You should consult with your tax professional or financial advisor before investing.
2. This article is not intended to provide investment advice and is an expression of my own opinion. Readers act upon this information at their own risk.
Disclosure: I hold shares in JNJ, MO and ABT and none of the other stocks mentioned as of Jun 18, 2010.