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If you are considering stocks for their dividends, be sure to also consider the company’s profitability – if a firm’s profitability suffers, its dividend yield may be the first to go.

We ran a screen on dividend champions, stocks that have consistently raised their dividends for the past 25 years. We ran DuPont analysis of return on equity (ROE) profitability on these dividend champions.

ROE can be broken up into three components such that increases 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.

Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the 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 stocks will continue to raise their yields? Use this list as a starting-off point for your own analysis.

List sorted by dividend yield.

1. Nacco Industries Inc. (NYSE:NC): Farm & Construction Machinery Industry. Market cap of $816.51M. Dividend yield at 2.19%, payout ratio at 13.40%. Net profit margin increased from 2.10% to 8.42%, Sales/Assets improved from 0.38 to 0.43, while Assets/Equity decreased from 3.74 to 3.35. This is a risky stock that is significantly more volatile than the overall market (beta = 2.31). The stock has gained 10.65% over the last year.

2. Parker Hannifin Corporation (NYSE:PH): Industrial Equipment & Components Industry. Market cap of $14.18B. Dividend yield at 1.69%, payout ratio at 17.80%. Net profit margin increased from 5.88% to 8.63%, Sales/Assets improved from 0.27 to 0.28, while Assets/Equity decreased from 2.14 to 2.08. The stock has gained 42.8% over the last year.

3. Dover Corp. (NYSE:DOV): Diversified Machinery Industry. Market cap of $12.47B. Dividend yield at 1.65%, payout ratio at 24.26%. Net profit margin increased from 6.83% to 9.95%, Sales/Assets improved from 0.20 to 0.21, while Assets/Equity decreased from 1.98 to 1.97. The stock has gained 42.79% over the last year.

4. Tennant Company (NYSE:TNC): Diversified Machinery Industry. Market cap of $814.79M. Dividend yield at 1.60%, payout ratio at 32.26%. Net profit margin increased from 2.72% to 3.40%, Sales/Assets improved from 0.41 to 0.42, while Assets/Equity decreased from 1.99 to 1.84. The stock has gained 27.57% over the last year.

5. Raven Industries Inc. (NASDAQ:RAVN): Printed Circuit Boards Industry. Market cap of $1.03B. Dividend yield at 1.27%, payout ratio at 27.51%. Net profit margin increased from 15.23% to 15.48%, Sales/Assets improved from 0.45 to 0.50, while Assets/Equity decreased from 1.32 to 1.32. The stock has gained 65.17% over the last year.

6. HB Fuller Co. (NYSE:FUL): Specialty Chemicals Industry. Market cap of $1.19B. Dividend yield at 1.24%, payout ratio at 17.46%. Net profit margin increased from 3.16% to 6.38%, Sales/Assets improved from 0.31 to 0.32, while Assets/Equity decreased from 2.00 to 1.73. The stock has had a good month, gaining 10.33%.

*Accounting data sourced from Google 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.

Source: 6 Dividend Champions With Strong Sources of Profitability