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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 dividend stocks enjoying high liquidity, with current ratios greater than 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 point for your own analysis.

List sorted by increase in ROE.

1. Alico Inc. (NASDAQ:ALCO): Operates as a land management company in central and southwest Florida. Market cap of $131.34M. Dividend yield at 2.59%, payout ratio at 12.72%. Current ratio at 3.86. MRQ Net Profit Margin increased to 15.18% from 8.05% year-over-year, Sales/Assets increased to 0.21 from 0.14, while Assets/Equity decreased to 1.68 from 1.87. The stock has performed poorly over the last month, losing 22.03%.

2. Steel Dynamics Inc. (NASDAQ:STLD): Engages in the manufacture and sale of steel products in the United States. Market cap of $2.79B. Dividend yield at 3.13%, payout ratio at 32.02%. Current ratio at 3.48. MRQ Net Profit Margin increased to 2.12% from 1.18% year-over-year, Sales/Assets increased to 0.34 from 0.28, while Assets/Equity decreased to 2.61 from 2.68. The stock has lost 21.85% over the last year.

3. 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 $453.96M. Dividend yield at 1.95%, payout ratio at 29.41%. Current ratio at 3.93. 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 has performed poorly over the last month, losing 11.07%.

4. Houston Wire & Cable Company (NASDAQ:HWCC): Distributes specialty wire and cable products in the U. Market cap of $207.91M. Dividend yield at 2.90%, payout ratio at 31.83%. Current ratio at 4.37. MRQ Net Profit Margin increased to 4.69% from 2.46% year-over-year, Sales/Assets increased to 0.54 from 0.49, while Assets/Equity decreased to 2.01 from 2.18. The stock is a short squeeze candidate, with a short float at 9.81% (equivalent to 15 days of average volume). The stock has had a couple of great days, gaining 5.41% over the last week.

5. Franklin Electric Co. Inc. (NASDAQ:FELE): Engages in the design, manufacture, and distribution of groundwater and fuel pumping systems. Market cap of $1.02B. Dividend yield at 1.23%, payout ratio at 20.67%. Current ratio at 3.18. MRQ Net Profit Margin increased to 8.57% from 6.54% year-over-year, Sales/Assets increased to 0.27 from 0.24, while Assets/Equity decreased to 1.86 from 1.89. The stock is a short squeeze candidate, with a short float at 6.22% (equivalent to 7.2 days of average volume). The stock has performed poorly over the last month, losing 10.61%.

6. Sturm, Ruger & Co. Inc. (NYSE:RGR): Engages in the design, manufacture, and sale of firearms in the United States. Market cap of $609.47M. Dividend yield at 1.34%, payout ratio at 19.69%. Current ratio at 3.25. MRQ Net Profit Margin increased to 13.34% from 10.34% year-over-year, Sales/Assets increased to 0.43 from 0.40, while Assets/Equity decreased to 1.36 from 1.36. The stock is a short squeeze candidate, with a short float at 9.56% (equivalent to 7.39 days of average volume). The stock has had a couple of great days, gaining 5.23% over the last week.

7. Raven Industries Inc. (NASDAQ:RAVN): Manufactures products for industrial, agricultural, construction, and military/aerospace markets in North America. Market cap of $1.05B. Dividend yield at 1.24%, payout ratio at 26.94%. Current ratio at 4.07. 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 1.2912 from 1.3032. The stock has gained 28.61% over the last year.

8. NewMarket Corp. (NYSE:NEU): Engages in the petroleum additives and real estate development businesses. Market cap of $2.59B. Dividend yield at 1.55%, payout ratio at 12.91%. Current ratio at 3.01. MRQ Net Profit Margin increased to 12.80% from 9.69% year-over-year, Sales/Assets increased to 0.46 from 0.44, while Assets/Equity decreased to 2.18 from 2.26. The stock is a short squeeze candidate, with a short float at 11.57% (equivalent to 13.88 days of average volume). The stock has gained 55.61% over the last year.

*Accounting data sourced from Google Finance, all other data sourced from Finviz.

Source: 8 Highly Liquid Dividend Stocks With Strong Sources Of Profitability