Most income investors know that when it comes to paying dividends, the amount of freely flowing cash is vital. You can have a high net income, but you need cash flow to pay sustainable dividends to shareholders. This article will attempt to find dividend stocks with high free cash flows, but also some other metrics that might make them desireable stock picks. Then we will consider timing the stock purchases at the end.
Keep in mind that we are less interested in high overall EPS growth as long as our companies create high cash flow, higher earnings yields, and a history, as well as a future expectation of some positive growth in earnings. (You will likely also enjoy the article 10 Buy Rated Income Stocks with Increasing Dividends)
Our screening idea will involve stocks with moderate PE ratios. In this scan we prefer lower PE ratios as it relates to earnings yield for a profitable operation. This includes a current and forward PE of less than 15.
Next, we want:
- High free cash flow less than 10.
- Mid-cap and bigger.
- Dividend yield over 2%.
- Positive trailing sales and earnings, as well as expected positive EPS growth this and next year.
- Price to book under 3
Dividend Quick Pick List
- MAY – Malaysia Fund Inc.
- CHL – China Mobile Limited
- HNP – Huaneng Power Internatinal Inc.
- ENI – Enersis S.A.
- LLL – L-3 Communications Holdings Inc.
- DEG – Delhaize Group
- NOK – Nokia Corporation
|Ticker||Current PE||Price to Book||Price to FCF||Annual EPS Growth% |
Next 5 Yrs
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It should be noted that MAY is a closed-end foreign fund.
CHL and HNP are Chinese companies, and many investors are nervous about the negative effect on all China stocks when looking at inflation plus the recent income reporting scandal primarily in China small caps. (Read more about some trading ideas on Chinese Small Caps here.)
Also disconcerting are the two recent downgrades in Feb. with Nokia.
- MAY has broken slightly below its upward trending channel, and sitting on $11 support.
- CHL has broken below $48.50 support, and $45 support is next on the list.
- ENI is picking up volume even as the price drops, which hopefully will signal a bottom above $18.
- LLL is channeling upwards and is currently touching the uppermost part of the channel, which some take as a sign for a short pull-back, even while moving upwards in the medium-term.
- DEG is heading towards $81 resistance as it makes a very shaky looking cup formation.
- NOK broke its upwards channel and fell below the bottom trendline, which is considered bearish. With support at $8.5, and stronger support at $8, I'd wait on this one to see where the bottom is finally put.
While buying stocks with high free cash flow, low PE, low P/B, and some growth is a start, price momentum and support levels must also be considered. The above list of stocks could all make decent holdings, but for the most part I think waiting for a bounce off support or a channel, or a confirmation of a bottom would be a prudent choice. Keep these stocks on your radar though. (An interesting article you might like is how to create your own highly yielding income stocks out of value picks with low dividends.)
Do you see an upside to buying one of the above dividend stocks right now? If so, I'd like to hear about why.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.