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Following my recent post on the relationship between higher payout ratio and higher future earnings growth, Pierre-Olivier of www.jourly.com asked me who I thought were the best U.S. dividend plays. And while I had some ideas based on stocks I have reviewed since creating Margin of Safety Investing, I thought I should try and answer the question based on the entire U.S. stock universe, not just the stocks I have analyzed so far.

To do so, I first generated a list of U.S. companies using Morningstar’s stock screener using the following criteria:

  • Market capitalization > $100 million
  • Dividend yield > 2%, making sure we are looking at the highest dividend payers (current S&P dividend yield = 2.3%)
  • Payout ratio of 60% or less - I usually want companies to have enough cash to keep growing and hence prefer a company with manageable payout ratios
  • I excluded financial services companies as I generally do not really know how to analyze/value them
  • Using Morningstar’s rating as a first pass, I set my screen to only select companies with a "financial health grade" of B or better

These criteria lead us to a list of c.180 stocks (much more than I was expecting), representing $4.6T of cumulative market cap.

You can find the list of companies and the key metrics that I will be using for the selection of the best U.S. dividend payers in this Google Doc.

Now, in order to select the best stocks among those 182, I will use filters along the three risk categories I usually review:

1 - Business risk

In order to evaluate business performance, I usually look into ROE and ROA over time as a starting point. Using ROE > 12% and ROA > 6% both on a trailing 12-month and five-year average, our list of potential best dividend payers comes down to 82 candidates.

In addition to good returns, I usually screen out companies experiencing very low growth or revenue declines. By filtering out companies having a 3-year revenue growth of 1% or less, our list of candidates drops to 53 stocks.

2 - Balance sheet risk

I prefer companies with conservative balance sheets and usually look at current ratios, debt/equity and debt/FCF. As current ratios levels are often “industry dependent” I will only use debt/equity as a criteria here. Using debt/equity < 1.0x, our universe is now down to 40 companies.

3 - Valuation risk

Finally, using a price to earnings (trailing) < 18x and FCF/Market Cap > 5% leaves us with 18 companies.

Name

Ticker

% ROE

5 Year

% ROA

5 Year

%
Dividend
Yield

Debt to Equity

Price/
Earnings
Trailing

Abbott Laboratories

ABT

22.9

10.1

3.6

0.6

15.6

Analog Devices, Inc.

ADI

20.1

15.8

2.3

0.1

16.2

AstraZeneca PLC ADR

AZN

38.7

16.6

5.0

0.4

8.7

AZZ, Inc.

AZZ

18.8

11.0

2.6

0.5

14.8

Bristol-Myers Squibb Company

BMY

37.7

15.7

4.9

0.4

9.7

Cal-Maine Foods, Inc.

CALM

28.3

14.3

3.1

0.3

10.3

ConAgra Foods, Inc.

CAG

16.2

6.5

3.7

0.7

13.7

Darden Restaurants, Inc.

DRI

24.5

8.7

2.3

0.8

16.6

Eli Lilly and Company

LLY

19.9

7.9

5.6

0.6

8.0

Flowers Foods, Inc.

FLO

15.9

9.2

3.1

0.2

17.2

General Dynamics

GD

20.6

8.5

2.4

0.2

10.7

Harris Corporation

HRS

18.6

8.8

2.0

0.5

9.6

Johnson & Johnson

JNJ

28.1

15.8

3.4

0.2

12.7

Kimberly-Clark Corporation

KMB

32.3

9.6

4.3

0.8

13.3

Medtronic, Inc.

MDT

22.7

12.1

2.4

0.5

12.4

Merck & Co Inc

MRK

29.0

12.0

4.2

0.3

13.8

Microsoft Corporation

MSFT

40.6

21.5

2.0

0.2

11.8

Novartis AG ADR

NVS

19.3

11.9

3.0

0.2

12.5

PepsiCo, Inc.

PEP

35.6

15.9

2.9

0.9

16.4

Procter & Gamble Company

PG

19.4

8.7

3.0

0.4

17.7

Raytheon Company

RTN

15.5

7.0

3.2

0.2

9.5

Telecommunications of Sao Paulo ADR

TSP

23.9

12.9

4.1

0.1

8.8

Tupperware Brands Corporation

TUP

28.4

7.3

2.1

0.6

13.4

United Breweries Company, Inc. ADR

CCU

19.7

9.4

2.1

0.5

15.1

United Technologies

UTX

22.2

7.8

2.2

0.5

17.1

VF Corporation

VFC

16.7

9.3

2.8

0.2

16.4

Wal-Mart Stores, Inc.

WMT

20.7

8.3

2.2

0.7

12.9

As you can see, a lot of companies are drug manufacturers, which I tend to avoid as a lot of them face a major patent cliff and thus potential for large revenue drops. However amongst those 18 companies, I think one can find some of the best U.S.-listed dividend payers with strong returns, good dividends and conservative balance sheets and with reasonable valuations.

It’s reassuring to me to see that I have already performed a stock review of a number of these stocks and put them in my watchlist.

Are those the stocks you were expecting? Anyone missing?

Source: What Are the Best U.S.-Listed Dividend Plays?