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Profitability is a very important consideration when choosing among dividend stocks. If you want to be able to rely on a company’s dividend, be sure that the company’s profits are also reliable.

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 1% and sustainable payout ratios below 50% with low debt, measured by debt-to-equity ratios below 0.3.

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.

Do you think these stocks pay reliable dividends? Use this list as a starting-off point for your own analysis.

List sorted by change in ROE.

1. Resources Connection Inc. (NASDAQ:RECN): Provides professional services in provides finance, accounting, risk management and internal audit, corporate advisory, strategic communications and restructuring, information management, human capital, supply chain management, actuarial, and legal and regulatory services in support of client-led projects and initiatives. Market cap of $514.02M. Dividend yield at 1.72%, payout ratio at 29.41%. Debt/Equity ratio at 0.0. MRQ Net Profit Margin increased to 1.88% from 0.99% year-over-year, Sales/Assets increased to 0.30 from 0.26, while Assets/Equity decreased to 1.26 from 1.33. The stock is a short squeeze candidate, with a short float at 6.25% (equivalent to 6.25 days of average volume). The stock has had a good month, gaining 16.87%.

2. Kennametal Inc. (NYSE:KMT): Manufactures and supplies tooling, engineered components, and advanced materials consumed in production processes worldwide. Market cap of $3.28B. Dividend yield at 1.39%, payout ratio at 14.60%. Debt/Equity ratio at 0.20. MRQ Net Profit Margin increased to 10.93% from 6.60% year-over-year, Sales/Assets increased to 0.25 from 0.22, while Assets/Equity decreased to 1.67 from 1.68. The stock has had a good month, gaining 19.3%.

3. Presidential Life Corp. (NASDAQ:PLFE): Through its subsidiary, Presidential Life Insurance Company engages in the marketing and sale of various fixed annuity, life insurance, and accident and health insurance products in the United States. Market cap of $303.09M. Dividend yield at 2.44%, payout ratio at 19.67%. Debt/Equity ratio at 0.0. MRQ Net Profit Margin increased to 18.60% from 10.06% year-over-year, Sales/Assets increased to 0.0188 from 0.0180, while Assets/Equity decreased to 5.37 from 5.76. The stock has had a good month, gaining 22.9%.

4. Abercrombie & Fitch Co. (NYSE:ANF): Operates as a specialty retailer of casual apparel for men, women, and kids. Market cap of $5.07B. Dividend yield at 1.20%, payout ratio at 30.85%. Debt/Equity ratio at 0.01. MRQ Net Profit Margin increased to 3.49% from 2.61% year-over-year, Sales/Assets increased to 0.31 from 0.26, while Assets/Equity decreased to 1.55 from 1.57. It's been a rough couple of days for the stock, losing 21.63% over the last week.

5. Quaker Chemical Corporation (NYSE:KWR): Develops, produces, and markets formulated chemical specialty products for various heavy industrial and manufacturing applications. Market cap of $484.93M. Dividend yield at 2.55%, payout ratio at 42.12%. Debt/Equity ratio at 0.18. MRQ Net Profit Margin increased to 7.33% from 4.61% year-over-year, Sales/Assets increased to 0.36 from 0.32, while Assets/Equity decreased to 1.99 from 2.39. This is a risky stock that is significantly more volatile than the overall market (beta = 2.63). The stock has had a couple of great days, gaining 8.22% over the last week.

6. WD-40 Company (NASDAQ:WDFC): Engages in the production and sale of consumer products. Market cap of $692.98M. Dividend yield at 2.49%, payout ratio at 49.81%. Debt/Equity ratio at 0.05. MRQ Net Profit Margin increased to 11.23% from 8.54% year-over-year, Sales/Assets increased to 0.32 from 0.28, while Assets/Equity decreased to 1.39 from 1.47. The stock is a short squeeze candidate, with a short float at 5.16% (equivalent to 9.09 days of average volume). The stock has gained 15.88% over the last year.

7. Raven Industries Inc. (NASDAQ:RAVN): Manufactures products for industrial, agricultural, construction, and military/aerospace markets in North America. Market cap of $1.10B. Dividend yield at 1.18%, payout ratio at 25.91%. Debt/Equity ratio at 0.0. MRQ Net Profit Margin increased to 13.79% from 11.41% year-over-year, Sales/Assets increased to 0.43 from 0.38, while Assets/Equity decreased to 1.29 from 1.29. The stock has had a good month, gaining 18.95%.

8. MarketAxess Holdings Inc. (NASDAQ:MKTX): Operates an electronic trading platform that enables investment industry professionals to trade corporate bonds and other types of fixed-income instruments. Market cap of $1.10B. Dividend yield at 1.25%, payout ratio at 31.48%. Debt/Equity ratio at 0.0. MRQ Net Profit Margin increased to 28.87% from 23.02% year-over-year, Sales/Assets increased to 0.14 from 0.13, while Assets/Equity decreased to 1.11 from 1.12. The stock has gained 57.39% over the last year.

9. Cummins Inc. (NYSE:CMI): Designs, manufactures, distributes, and services diesel and natural gas engines, electric power generation systems, and engine-related component products worldwide. Market cap of $19.48B. Dividend yield at 1.58%, payout ratio at 13.84%. Debt/Equity ratio at 0.14. MRQ Net Profit Margin increased to 9.77% from 8.32% year-over-year, Sales/Assets increased to 0.41 from 0.34, while Assets/Equity decreased to 2.18 from 2.35. The stock has had a good month, gaining 12.01%.

*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: 9 Low Debt Dividend Stocks With Strong Sources Of Profitability