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In today’s low interest rate environment, investment-grade corporate bonds and government bonds offer very low yields. Investors seeking additional income in today’s markets are tempted to purchase high yield debt and dividend-yielding stocks. Fixed income investors should realize that there is nothing for free, and that there are risks associated with higher returns. Investors should attempt to understand and weigh the risks of their holdings.

Fortunately, there are credit scoring systems that classify stocks into different risk classes according to quantitative measures. One predictive measure of bankruptcy for non-financial companies is the Altman Z-Score. This score places companies into three groups: “safe” (Z-score > 2.99), “grey” (Z-score between 2.99 and 1.81), and “distressed*” (Z-score < 1.81). This metric is surprisingly useful for identifying bankruptcy risk in the coming year. Atlman’s method of segmenting companies uses fundamental (financial statement) data and market capitalization only.** Beyond credit risk prediction, companies with higher Z-scores have been shown to outperform companies with lower Z-scores, in aggregate.

The Altman Z-score was recently (using financial data reported this year) calculated for hundreds of companies with dividend yields in excess of the 10-year Treasury yield (currently 2.15%). Stocks paying dividend yields above 2.15% which scored in the “safe” zone are presented below:

Stocks with Dividend Yields Above 2.15% and "Safe" Altman Z-Scores

Ticker

Dividend Yield

P/E

Payout Ratio

Altman Z-Score

PDLI

9.90%

8.78

101.9%

4.33

AT

7.91%

5.12

18.8%

5.00

INTX

7.77%

9.72

52.2%

4.92

USMO

7.01%

2.9

20.0%

3.85

WRLS

6.67%

2.39

15.6%

6.28

LLY

5.26%

8.89

48.7%

3.62

TCCO

4.99%

3.13

14.1%

10.02

FRD

4.86%

8.49

73.9%

7.14

DDIC

4.55%

9.46

41.5%

3.97

KOSS

4.53%

9.46

N/A

4.91

JCS

4.39%

9.17

40.2%

6.84

STRA

4.39%

9.32

39.1%

10.17

DEST

4.29%

8.69

28.0%

4.93

TESS

4.27%

8.84

27.4%

5.43

EBF

4.26%

9.26

39.6%

4.31

SUP

4.00%

8.85

35.1%

5.21

AVCA

3.93%

6.22

23.4%

3.45

AM-OLD

3.84%

6.86

24.7%

3.28

COP

3.70%

9.15

32.2%

3.14

NOC

3.44%

8.78

28.8%

3.06

LINC

3.42%

5.31

N/A

3.84

CRWS

3.38%

8.26

22.8%

4.65

BRKS

3.20%

4.61

0.0%

3.51

AIRT

3.11%

9.8

40.0%

5.95

CVX

3.07%

7.82

22.2%

4.51

MSFT

3.04%

9.56

24.4%

4.79

KLAC

3.02%

9.5

22.1%

5.76

LXK

3.01%

7.77

N/A

3.07

EEI

2.96%

9.82

28.2%

4.16

FLXS

2.96%

9

20.9%

5.63

AERL

2.88%

3.58

N/A

12.53

GCI

2.83%

5.33

N/A

3.26

KRO

2.82%

9

44.8%

3.67

AMAT

2.61%

8.45

20.4%

5.04

FCX

2.55%

6.85

34.6%

3.46

MANT

2.54%

8.86

N/A

3.71

NC

2.52%

5.29

13.2%

3.34

NAFC

2.50%

7.53

17.5%

6.05

ADM

2.42%

8.83

19.2%

3.65

SYNL

2.39%

9.36

0.0%

5.13

XOM

2.39%

9.48

22.0%

4.92

BBY

2.34%

9.19

19.7%

4.08

VLO

2.34%

6.55

N/A

3.78

AVX

2.33%

8.63

14.1%

7.46

AE

2.25%

7.06

15.9%

8.27

MKSI

2.25%

9.86

16.7%

8.99

The firms on this list offer attractive dividend yields and have a low probability of bankruptcy. Thus, they offer good chances for attractive risk-adjusted returns. Although being on this list is a good sign, investors also have to consider other factors beyond current dividend yields and bankruptcy risk. For example, PDL BioPharma, Inc. (NASDAQ:PDLI) is at risk of dropping its dividend payout since it is currently paying more in dividends than it earns.

Consider the five highlighted stocks on this list: Atlantic Power Corporation (NYSE:AT), Intersections Inc. (NASDAQ:INTX), USA Mobility, Inc. (NASDAQ:USMO), Telular Corp. (NASDAQ:WRLS), and Eli Lilly & Co. (NYSE:LLY). They hail from four different industries: AT is an electric utility, LLY is a drug manufacturer, INTX is a consumer protection company, while WRLS and USMO are wireless communications companies. These stocks could diversify your portfolio since they have a low 0.48 average beta (USMO has the highest beta at 0.75).

Dividend investors ought to scan this list for additional stocks to add to their dividend portfolios. Future articles will analyze how other names on this list would impact your portfolio.

*“Distressed” was a label coined by researchers, and should not be taken to mean that any company is bankrupt or in default on the basis of this calculation alone. Credit scoring is not fate, only prediction based on relative past performance of companies grouped by key variables. Time will tell.

**Volatility has be incorporated into a credit scoring model to improve accuracy, but this would reduce the value of a fundamentals-only model for indicating companies for option strategies.

Disclaimer: This article was written to provide investor information and education, and should not be construed as a guarantee or investment advice. I have no idea what your individual risk, time-horizon, and tax circumstances are: please seek the personal advice of a financial planner. This article uses third-party data and may contain approximations and errors. Please check estimates and data for yourself before investing.

Source: 45 Dividend Stocks With Good Credit Scores