6 Dividend Stocks With High Profit Margins

by: Dividend Monk

It's not too surprising that some of the highest profit margin businesses out there are some of the most well-known. When a business can maintain a high profit margin, it often implies that it has a significant competitive advantage over its competitors. If this wasn't the case, then competitors would have chipped into those margins.

But it's not quite as fair as that, because some industries simply offer profit margins that are far higher than other industries. Established companies in the healthcare or technology sectors almost always have higher margins than retailers and food producers, for instance. It's more meaningful to take into account both the absolute profit margin and the profit margin relative to its peers. It's also extremely useful to look at return on equity to see how efficiently and powerfully the company is compounding its money in relation to its amount of leverage. One of the most fundamental goals of a business is to achieve good returns on equity on a risk-adjusted basis.

This is by no means exhaustive, but here are a few high profit margin businesses that also pay dividends.

Microsoft (NASDAQ:MSFT), which has market dominance of operating systems and business software, has high profit margins even for the software industry. The margins represented here are actually weighed down by some of Microsoft's less profitable business segments such as online tools and XBox, which it's able to offset with its core competencies, which are Windows and Office, and, to some extent, servers and tools. Neither Google (NASDAQ:GOOG) nor Oracle (NASDAQ:ORCL) maintain profit margins as high as Microsoft. A lengthier analysis on Microsoft, including a representation of the various margins of their segments, can be found here.

Gross Margin: 78.1%
Operating Margin: 39.2%
Net Margin: 31.8%
Current Net Margin higher than three years ago? Yes
Return on Equity: 44%
Dividend Yield: 2.28%

Johnson and Johnson (NYSE:JNJ) has higher profit margins than most diversified healthcare companies. Even when JNJ's less profitable segments are taken into account, the total margins are on par with or surpass a lot of its competitors. Margins were even preserved fairly well during the period of recalls and bad publicity for its quality control.

Gross Margin: 69.3%
Operating Margin: 26.3%
Net Margin: 19.8%
Current Net Margin higher than three years ago? No
Return on Equity: 22%
Dividend Yield: 3.46%

Coca-Cola Company (NYSE:KO), as a pure beverage company, carries high margins. Other consumer food choices typically have lower margins than beverage syrups. Even when compared to other pure beverage companies, the scale and the brand power of Coke gives it a margin advantage. PepsiCo (NYSE:PEP) has its profit margins weighed down significantly due to its large snack food business (company net margin: 10%). Hansen Natural (HANS) and Dr Pepper Snapple Group (NYSE:DPS) both have margins lower than Coca-Cola (with company net margins of 16% and 10%, respectively).

Gross Margin: 63.0%
Operating Margin: 22.4%
Net Margin: 31.8% (due to one time events; typically ~20%)
Current Net Margin higher than three years ago? Yes
Return on Equity: 42.33%
Dividend Yield: 2.72%

McCormick (NYSE:MKC), a company that primarily offers spices, has a higher profit margin than many of its competitors, including Heinz (HNZ). Spices tend to sell for high prices per unit weight. Other food producers such as Kraft (KFT) and ConAgra (NYSE:CAG) have lower profit margins than McCormick. A notable exception is General Mills (NYSE:GIS), which has slightly higher operating and net margins.

Gross Margin: 42.4%
Operating Margin: 15.4%
Net Margin: 11%
Current Net Margin higher than three years ago? Yes
Return on Equity: 26.5%
Dividend Yield: 2.25%

McDonald's Corporation (NYSE:MCD), due to its huge scale, focus on a single powerful brand, and high traffic density per restaurant, has profit margins that far exceed its competitors in the fast food industry. Yum Brands (NYSE:YUM) (net margin: 10%), Wendy's (NYSE:WEN) (net margin: 0%), Starbucks (NASDAQ:SBUX) (net margin: 10%), and others have net profit margins significantly lower than McDonald's.

Gross Margin: 39.9%
Operating Margin: 31.0%
Net Margin: 20.6%
Current Net Margin higher than three years ago? Yes
Return on Equity: 35.5%
Dividend Yield: 2.77%

Linear Technology (NASDAQ:LLTC)
: In the technology hardware world, high performance analog chips tend to carry the highest margins. This is because despite being difficult to design, analog components are less cutting edge than many digitial components and therefore have longer product life cycles. Products that do a task well can remain on the market with little change for several years. As a result, profitability tends to be quite high for analog chipmakers. Linear Technology, in particular, has extremely high profit margins. In certain years, the net profit margin has exceeded 40%. In addition, Linear Technology has a pretty successful string of consecutive dividend increases for the tech industry, and offers a dividend yield slightly above 3%. The company does carry more debt than is the norm for the tech industry, however.

Gross Margin: 78.2%
Operating Margin: 52.2%
Net Margin: 36.7%
Current Net Margin higher than three years ago? Yes (but lower than 5 years ago)
Return on Equity: n/a (lack of equity)
Dividend Yield: 3.08%

Disclosure: I am long JNJ, KO.