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A company’s profitability can come from more than one source, and some are preferred over others. This is why an analysis beyond the top and bottom-line numbers is important when choosing stocks.

One way to analyze sources of profitability is with DuPont analysis of return on equity (ROE) profitability.

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.

To illustrate this analysis, we ran DuPont on stocks paying dividend yields above 2% and sustainable payout ratios below 50%. We also screened for stocks with long-term growth in profitability, comparing EBITDA/common equity (EBITDA is earnings before interest, taxes, depreciation, and amortization) in the trailing twelve months to the last five years.

We also controlled for high interest payments (which would not be reflected in EBITDA) by screening for companies with growing interest coverage.

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 stocks pay reliable dividend yields? Use this list as a starting-off point for your own analysis.

List sorted by dividend yield.

1. Marsh & McLennan Companies, Inc. (MMC): Provides advice and solutions in the areas of risk, strategy, and human capital. Market cap of $14.47B. Dividend yield at 3.30%, payout ratio at 42.96%. TTM EBITDA/common equity at 0.28 vs. 5-year average at 0.20. TTM interest coverage at 9.50 vs. prior-year TTM at 3.50. MRQ Net Profit Margin increased to 9.63% from 9.06% year-over-year, Sales/Assets increased to 0.19 from 0.17, while Assets/Equity decreased to 2.30 from 2.60. The stock has performed poorly over the last month, losing 10.19%.

2. PPG Industries Inc. (PPG):
Manufactures and supplies protective and decorative coatings. Market cap of $11.26B. Dividend yield at 3.20%, payout ratio at 26.18%. TTM EBITDA/common equity at 0.59 vs. 5-year average at 0.45. TTM interest coverage at 8.42 vs. prior-year TTM at 6.84. MRQ Net Profit Margin increased to 8.53% from 7.87% year-over-year, Sales/Assets increased to 0.2611 from 0.2587, while Assets/Equity decreased to 3.77 from 3.87. The stock has gained 0.75% over the last year.

3. Cabot Corp. (CBT):
Provides specialty chemicals and performance materials worldwide. Market cap of $1.67B. Dividend yield at 2.83%, payout ratio at 19.30%. TTM EBITDA/common equity at 0.33 vs. 5-year average at 0.24. TTM interest coverage at 7.97 vs. prior-year TTM at 5.46. MRQ Net Profit Margin increased to 6.46% from 6.24% year-over-year, Sales/Assets increased to 0.2847 from 0.2785, while Assets/Equity decreased to 2.05 from 2.19. It's been a rough couple of days for the stock, losing 9.41% over the last week.

4. Eastman Chemical Co. (EMN):
Engages in the manufacture and sale of chemicals, plastics, and fibers in the United States and internationally. Market cap of $4.88B. Dividend yield at 2.71%, payout ratio at 15.71%. TTM EBITDA/common equity at 0.66 vs. 5-year average at 0.48. TTM interest coverage at 12.19 vs. prior-year TTM at 6.78. MRQ Net Profit Margin increased to 11.19% from 9.85% year-over-year, Sales/Assets increased to 0.31 from 0.26, while Assets/Equity decreased to 3.21 from 3.46. The stock has performed poorly over the last month, losing 14.79%.

5. KLA-Tencor Corporation (KLAC): Engages in the design, manufacture, and marketing of process control and yield management solutions for the semiconductor and related nanoelectronics industries. Market cap of $6.49B. Dividend yield at 2.58%, payout ratio at 17.10%. TTM EBITDA/common equity at 0.49 vs. 5-year average at 0.17. TTM interest coverage at 23.08 vs. prior-year TTM at 13.67. MRQ Net Profit Margin increased to 27.46% from 20.21% year-over-year, Sales/Assets increased to 0.19 from 0.14, while Assets/Equity decreased to 1.63 from 1.74. Might be undervalued at current levels, with a PEG ratio at 0.88, and P/FCF ratio at 10.73. The stock has gained 13.73% over the last year.

6. Timken Co. (TKR): Develops, manufactures, markets, and sells anti-friction bearings and related products and steel products primarily in the United States and Europe. Market cap of $3.14B. Dividend yield at 2.51%, payout ratio at 16.10%. TTM EBITDA/common equity at 0.41 vs. 5-year average at 0.29. TTM interest coverage at 18.41 vs. prior-year TTM at 4.37. MRQ Net Profit Margin increased to 9.14% from 8.46% year-over-year, Sales/Assets increased to 0.32 from 0.25, while Assets/Equity decreased to 1.91 from 2.44. This is a risky stock that is significantly more volatile than the overall market (beta = 2.04). It's been a rough couple of days for the stock, losing 5.47% over the last week.

7. Baxter International Inc. (BAX): Develops, manufactures, and markets products for people with hemophilia, immune disorders, infectious diseases, kidney disease, trauma, and other chronic and acute medical conditions. Market cap of $31.63B. Dividend yield at 2.23%, payout ratio at 28.56%. TTM EBITDA/common equity at 0.54 vs. 5-year average at 0.45. TTM interest coverage at 41.46 vs. prior-year TTM at 24.96. MRQ Net Profit Margin increased to 17.39% from 16.75% year-over-year, Sales/Assets increased to 0.20 from 0.19, while Assets/Equity decreased to 2.54 from 2.80. The stock has gained 19.62% over the last year.

8. Williams-Sonoma Inc. (WSM):
Operates as a specialty retailer of home products. Market cap of $3.35B. Dividend yield at 2.11%, payout ratio at 44.97%. TTM EBITDA/common equity at 0.40 vs. 5-year average at 0.31. TTM interest coverage at 2055.15 vs. prior-year TTM at 309.81. MRQ Net Profit Margin increased to 4.82% from 3.97% year-over-year, Sales/Assets increased to 0.41 from 0.39, while Assets/Equity decreased to 1.61 from 1.65. The stock has gained 1.38% over the last year.

*EBITDA/common equity and interest coverage data sourced from Screener.co, 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: 8 Dividend Stocks With Strong Sources Of Growing Profitability