If you’re looking for sources of dividend income, there are several considerations to keep in mind, particularly if you are concerned about maintaining that yield. Dividend yields above 7% and payout ratios above 35% may be unsustainably large. Also, cash flow trends should be positive enough to indicate that the company can keep funding their dividend.
We ran a screen on tech stocks paying dividend yields between 2-7% and payout ratios below 35% for those showing positive cash trends. Using levered free cash flow, or the cash flow available after paying interest on outstanding debt, we searched for those companies with high levered free cash flow relative to market cap. Not only does that indicate dividend sustainability, it also indicates a potentially undervalued opportunity.
Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the top six stocks mentioned below. Analyst ratings sourced from Zacks Investment Research.
We also created a price-weighted index of the stocks mentioned below, and monitored the performance of the list relative to the S&P 500 index over the last month. To access a complete analysis of this list's recent performance, click here.
List sorted by levered free cash flow as a percent of market cap.
1. Technical Communications Corp. (TCCO): Communication Equipment Industry. Market cap of $15.06M. Dividend yield at 4.86%, payout ratio at 11.04%. TTM Levered Free Cash flow at $2.46M, which represents 16.33% of the company's market cap. The stock has lost 23.51% over the last year.
2. Computer Sciences Corporation (CSC): Information Technology Services Industry. Market cap of $5.75B. Dividend yield at 2.16%, payout ratio at 15.30%. TTM Levered Free Cash flow at $623.38M, which represents 10.84% of the company's market cap. Might be undervalued at current levels, with a PEG ratio at 0.91, and P/FCF ratio at 10.55. The stock has lost 17.68% over the last year.
3. Applied Materials Inc. (AMAT): Semiconductor Equipment & Materials Industry. Market cap of $17.11B. Dividend yield at 2.47%, payout ratio at 24.23%. TTM Levered Free Cash flow at $1.65B, which represents 9.64% of the company's market cap. The stock has gained 7.81% over the last year.
4. Telular Corp. (WRLS): Wireless Communications Industry. Market cap of $94.36M. Dividend yield at 6.38%, payout ratio at 12.03%. TTM Levered Free Cash flow at $7.05M, which represents 7.47% of the company's market cap. The stock has gained 167.95% over the last year.
5. Harris Corp. (HRS): Communication Equipment Industry. Market cap of $5.46B. Dividend yield at 2.33%, payout ratio at 20.59%. TTM Levered Free Cash flow at $389.06M, which represents 7.13% of the company's market cap. The stock is a short squeeze candidate, with a short float at 9.42% (equivalent to 10.62 days of average volume). It's been a rough couple of days for the stock, losing 5.82% over the last week.
Levered free cashflow data sourced from Yahoo Finance, all other data sourced from Finviz.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.