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When choosing a source of dividend income, it is important to check for encouraging trends in profitability. If a company is becoming less profitable or their profitability starts coming from less preferred sources, their dividend yield may be in danger.

Debt is also an important consideration, as debtholders are always paid before dividends. When company debt rises significantly, it also endangers the dividend yield.

With these ideas in mind, we screened dividend stocks (with dividend yield above 2% and a sustainable payout ratio below 35%) for those coming from companies with low debt, with most recent quarter total debt to assets below 0.2. We then screened for those companies with strong sources of return on equity (ROE) profitability, by using DuPont analysis.

ROE can be broken up into three components such that changes in ROE can be attributed to those components.

ROE:

= (Net Profit/Equity)
= (Net profit/Sales)*(Sales/Assets)*(Assets/Equity)
= (Net Profit margin)*(Asset turnover)*(Leverage ratio)

Analyzing the sources of returns for a company, we can focus on companies with the following characteristics: Increasing ROE along with,

  • Decreasing leverage, i.e. decreasing Asset/Equity ratio
  • Improving asset use efficiency (i.e. increasing Sales/Assets ratio) and improving net profit margin (i.e. increasing Net Income/Sales ratio)

Companies passing all requirements are thus experiencing increasing profits due to operations, and not to increased use of leverage. The final screen produced 11 stocks, listed below.

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.

[Click to enlarge]




Do you think these companies are paying sustainable dividends? Use this list as a starting-off point for your own analysis. List sorted by dividend yield.

1. ConocoPhillips (NYSE:COP): Major Integrated Oil & Gas Industry. Market cap of $105.08B. Dividend yield at 3.56%, payout ratio at 31.61%. MRQ total debt to assets at 0.15. MRQ net profit margin increased to 5.20% from 4.58% one year ago, Sales/Assets increased to 0.36 from 0.3, while Assets/Equity decreased to 2.28 from 2.46. The stock has gained 44.97% over the last year.

2. Marathon Oil Corporation (NYSE:MRO): Oil & Gas Refining & Marketing Industry. Market cap of $22.45B. Dividend yield at 3.18%, payout ratio at 17.87%. MRQ total debt to assets at 0.16. MRQ net profit margin increased to 4.73% from 2.74% one year ago, Sales/Assets increased to 0.41 from 0.35, while Assets/Equity decreased to 2.1 from 2.15. Might be undervalued at current levels, with a PEG ratio at 0.77, and P/FCF ratio at 9.24. It's been a rough couple of days for the stock, losing 7.48% over the last week.

3. Selective Insurance Group Inc. (NASDAQ:SIGI): Property & Casualty Insurance Industry. Market cap of $894.57M. Dividend yield at 3.15%, payout ratio at 33.30%. MRQ total debt to assets at 0.05. MRQ net profit margin increased to 5.34% from 1.48% one year ago, Sales/Assets increased to 0.08 from 0.07, while Assets/Equity decreased to 4.87 from 5.24. The stock has gained 12.04% over the last year.

4. Foot Locker, Inc. (NYSE:FL): Apparel Stores Industry. Market cap of $3.58B. Dividend yield at 2.85%, payout ratio at 26.93%. MRQ total debt to assets at 0.04. MRQ net profit margin increased to 6.47% from 4.22% one year ago, Sales/Assets increased to 0.47 from 0.43, while Assets/Equity decreased to 1.46 from 1.52. The stock has gained 77.81% over the last year.

5. Northrop Grumman Corporation (NYSE:NOC): Conglomerates Industry. Market cap of $18.52B. Dividend yield at 2.82%, payout ratio at 27.82%. MRQ total debt to assets at 0.15. MRQ net profit margin increased to 7.87% from 6.78% one year ago, Sales/Assets increased to 0.25 from 0.23, while Assets/Equity decreased to 2.11 from 2.35. The stock is a short squeeze candidate, with a short float at 8.66% (equivalent to 10.86 days of average volume). The stock has gained 37.49% over the last year.

6. The Allstate Corporation (NYSE:ALL): Property & Casualty Insurance Industry. Market cap of $15.68B. Dividend yield at 2.81%, payout ratio at 21.20%. MRQ total debt to assets at 0.05. MRQ net profit margin increased to 6.41% from 1.55% one year ago, Sales/Assets increased to 0.06 from 0.06, while Assets/Equity decreased to 6.75 from 7.54. The stock has gained 5.08% over the last year.

7. Autoliv, Inc. (NYSE:ALV): Auto Parts Industry. Market cap of $6.24B. Dividend yield at 2.45%, payout ratio at 0.24%. MRQ total debt to assets at 0.12. MRQ net profit margin increased to 8.61% from 7.35% one year ago, Sales/Assets increased to 0.35 from 0.33, while Assets/Equity decreased to 1.95 from 2.11. It's been a rough couple of days for the stock, losing 11.1% over the last week.

8. KLA-Tencor Corporation (NASDAQ:KLAC): Semiconductor Equipment & Materials Industry. Market cap of $6.94B. Dividend yield at 2.43%, payout ratio at 19.97%. MRQ total debt to assets at 0.17. MRQ net profit margin increased to 25.15% from 11.92% one year ago, Sales/Assets increased to 0.19 from 0.13, while Assets/Equity decreased to 1.66 from 1.71. The stock has gained 34.43% over the last year.

9. Illinois Tool Works Inc. (NYSE:ITW): Diversified Machinery Industry. Market cap of $28.80B. Dividend yield at 2.37%, payout ratio at 27.28%. MRQ total debt to assets at 0.19. MRQ net profit margin increased to 14.20% from 8.93% one year ago, Sales/Assets increased to 0.25 from 0.24, while Assets/Equity decreased to 1.7 from 1.82. The stock has gained 33.83% over the last year.

10. Presidential Life Corp. (NASDAQ:PLFE): Life Insurance Industry. Market cap of $328.82M. Dividend yield at 2.25%, payout ratio at 24.77%. MRQ total debt to assets at 0.00. MRQ net profit margin increased to 11.50% from -3.09% one year ago, Sales/Assets increased to 0.02 from 0.02, while Assets/Equity decreased to 5.58 from 6.27. The stock has had a good month, gaining 13.47%.

11. National Healthcare Corp. (NYSEMKT:NHC): Long-Term Care Facilities Industry. Market cap of $690.95M. Dividend yield at 2.25%, payout ratio at 23.35%. MRQ total debt to assets at 0.01. MRQ net profit margin increased to 9.70% from 6.05% one year ago, Sales/Assets increased to 0.23 from 0.22, while Assets/Equity decreased to 1.44 from 1.48. The stock has gained 46.17% over the last year.

*Dividend data sourced from Screener.co, accounting data sourced from Google Finance, all other data sourced from Finviz.

Source: 11 Low-Debt Dividend Stocks With Strong Sources of Profitability