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Increased market volatility and the very low rates offered by Treasuries all seem to be playing a role in pushing a larger number of individuals into seeking stocks that pay out dividends. While dividend investing is the key to building long term wealth, investors should be wary of simply chasing a stock based on its yield alone.

Novice investor should familiarize themselves with several key metrics when it comes to investing in stocks that offer high yields. The following is sampling of some of the key metrics, we think novice/general investors should understand before jumping into high-yielding dividend stocks.

Enterprise value is a combination of the market cap, debt, minority interests, preferred shares less total cash and cash equivalents. This provides a better picture because it is a more accurate representation of a company's value contrary to simply looking at the market cap.

Levered free cash flow is the amount of cash available to stock holders after interest payments on debt are made. A company with a small amount of debt will only have to spend a modest amount of money on interest payments, which in turn means that there is more money to send to shareholders in the form of dividends and vice versa. (Individuals searching for larger cap stocks in the basic materials sectors might find this article to be of interest.)

Operating cash flow is generally a better metric than earnings per share because a company can show positive net earnings and still not be able to properly service its debt; the cash flow is what pays the bills.

The payout ratio tells us what portion of the profit is being returned to investors. A pay out ratio over 100% indicates that the company is paying out more money to shareholders than it is making; this situation cannot last forever. In general, if the company has a high operating cash flow and access to capital markets, it can keep this going on for a while. As companies usually only pay the portion of the debt that is coming due, and not the whole debt, this technique/trick can technically be employed to maintain the dividend for sometime. If the payout ratio continues to increase, the situation warrants close monitoring. If your tolerance for risk is low, look for similar companies with the same or higher yields, but with lower payout ratios.

Our favorite play on the list is Vector Group (VGR). It has increased its dividends for 12 years in a row, has an earning's growth rate of 60.9%, a five-year dividend growth rate of 5.00%, a five-year dividend average of 9.5%, a total return for the past three years and five years of 91% and 81%, respectively, and it has been paying dividends since 1990. It also sports price/sales of 1.27 and price/cash flow of 15.20. Out of a possible 5 stars, we would assign it 4.

Other noteworthy players are ConocoPhillips (COP), Du Pont E.I. de Nemours & Co (DD) and Exxon Mobil Corp (XOM), with yields of 3.6%, 3.5% and 2.5% respectively. These 3 stocks, however, fall under the very large cap category.

COP has been paying dividends since 1934, has increased them consecutively for 10 years, a five-year dividend growth rate of 13.09%, a three total return of roughly 63%, a quarterly revenue growth rate of 35%, a ROE of 16.3%, and an extremely large levered free cash flow rate of $10.55 billion. It also sports the following ratios: price to tangible book of 1.58, price to cash flow of 5.00, price to free cash flow of 26.30, a low payout ratio of 33% and a five year EPS growth rate of -7.93%. We would assign COP a total of four stars out of a possible five.

DD has been paying dividends since 1904, has a five-year dividend growth rate of 2.12%, a three total return of roughly 104%, a quarterly revenue growth rate of 30.6, a quarterly earnings growth rate of 23%, a ROE of 32% and a healthy levered free cash flow rate of $1.16 billion. It also sports the following ratios: price to tangible book of 161, price to cash flow of 8.60, price to free cash flow of -7.80, a low payout ratio of 45% and a five year EPS growth rate of 0.63%.

XOM has been paying dividends since 1882, has increased them consecutively for 28 years, has a three-year total return of roughly 19%, a quarterly earnings growth rate of 40.5% (which is very good for a company with such a large market cap), a quarterly revenue growth rate of 31.5%, a ROE of 26.85%, and incredibly large levered free cash flow rate of $21 billion. XOM also sports the following ratios: price to tangible book of 2.7, price to cash flow of 7.00, price to free cash flow of 27 and a five year EPS growth rate of 1.95%

Stock

Yield

Market cap

Forward PE

EBITDA

Quarterly revenue growth

Beta

Revenue

Cash flow

PSE

7.0%

863M

9.4

152.6M

22.9%

0.41

208M

111M

BBEP

10.2%

1.1B

16.24

223.1M

26.9%

0.50

167M

366M

BMA

10.8%

1.14B

4

-------

31%

1.05

915M

398M

VGR

8.60%

1.4B

18

143.1M

1.90%

0.38

546M

29.9M

Pioneer Southwest Energy Partners (PSE)

PSE has an enterprise value of $969 million, a quarterly revenue growth rate of 22.9% a ROE of 77.72%, a strong three-year dividend growth rate of 49.4%, a total three-year return of 159%, and has been paying dividends since 2008. Net income for the past three years is as follows: In 2008, it was $94 million, in 2009 it dropped to $26 million and in 2010, it jumped up to $105.8 million. For 2011, it stands at $130 million. It has a levered free cash flow rate of $54 million.

Key Ratios

  1. Price to tangible book 4.68
  2. Price to cash flow 5.90
  3. Price to free cash flow -47.50
  4. 5 year sales growth N/A
  5. Inventory turnover 44.20
  6. Asset turnover 0.70

  1. ROE 77.72%
  2. Return on assets 28.7%
  3. 200 day moving average $ 28.98
  4. Total debt $ 97 million
  5. Book value $5.65
  6. Dividend yield 5 year Average 11.7%
  7. Dividend rate $2.02
  8. Payout ratio 130%
  9. Dividend growth rate 3 year average 49.4%
  10. Consecutive dividend increases 0 year
  11. Paying dividends since 2008
  12. Total return last 3 years 159%
  13. Total return last 5 years N/A

Breitburn Energy Partners L.P (BBEP)

It has enterprise value of $1.63 billion, a quarterly revenue growth of 26.9%, a ROE of 5.21% a three-year dividend growth rate of -0.36%, a total return of 264%for the past three years, and has been paying dividends since 2007. It has a levered free cash flow rate of $4.76 million. Net income for the past three years is as follows; in 2008, it was $378 million, in 2009 it dropped significantly to -$107 million and in 2010 it moved up slightly to $34.7 million. For 2011, it currently stands at roughly $140 million.

Key Ratios

  1. Price to tangible book 0.81
  2. Price to cash flow 6.20
  3. Price to sales 1.90
  4. 5 year sales growth 60.29%
  5. Inventory turnover 33.00
  6. Asset turnover 0.30

  1. ROE 5.21%
  2. Return on assets 3.54%
  3. 200 day moving average $18.15
  4. Total debt $516M
  5. Book value $ 23.52
  6. Dividend yield 5 year Average 13.50%
  7. Dividend rate $1.69
  8. Payout ratio 193%
  9. Dividend growth rate 3 year average -0.36%
  10. Consecutive dividend increases 1 years
  11. Paying dividends since 2007
  12. Total return last 3 years 264%
  13. Total return last 5 years 6.09%

Banco Macro S.A. (BMA)

BMA has an enterprise value of $746 million, a quarterly revenue growth rate of 31%, a quarterly earnings growth of 17.3%, a ROE of 26%, a five-year dividend growth rate of 66.4%, a total three-year return of 107%, a EPS of 4.28, sales per share of 13.39, a price/cash flow of 6.00 and price/book 1.11.

Net income for the past three years is as follows: In 2008, it came in at $182 million, in 2009 it rose to $197million and in 2010, it surged significantly to $245.38 million. If it had a longer dividend history we would have assigned it 4 stars out of a possible. At this point, we would assign it 3.5 stars.

Key Ratios

  1. Price to tangible book 1.19
  2. Price to cash flow 6.00
  3. Price to free cash flow 5.60
  4. 5 year sales growth 13.15%
  5. Inventory turnover N/A
  6. Asset turnover 0.10

  1. ROE 26.51%
  2. Return on assets 3.15%
  3. Total debt $ 699 million
  4. 200 day moving average $ 26.27
  5. Book value $17.46
  6. Dividend yield 5 year Average 5.90%
  7. Dividend rate $1.49
  8. Payout ratio 49%
  9. Dividend growth rate 5 year average 66.41%
  10. Consecutive dividend increases 1 year
  11. Paying dividends since 2006
  12. Total return last 3 years 107%
  13. Total return last 5 years -18%

Vector Group Ltd. (VGR)

VGR has an enterprise value of $1.55 billion, a quarterly earning's growth rate of 60.9%, a five year EPS growth of 5.28%, a total three-year return of 93%, a EPS of 0.94, cash flow per share of11.18, price/sales of 1.24, and a price/cash flow of 14.90. VGR also has a levered free cash flow rate of 58.19 million. Net income for the past three years is as follows: In 2008, it was $60 Million, in 2009 it dropped to $24.8 million and in 2010, it doubled to $54 million. For 2011, it stands at $66 million.

Key Ratios

  1. Price to tangible book - 7.98
  2. Price to cash flow 14.90
  3. Price to free cash flow -11.10
  4. 5 year sales growth 19.45
  5. Inventory turnover 8.20
  6. Asset turnover 1.20

  1. Return on assets of 9.26%
  2. Total debt $ 517 million
  3. 200 day moving average $ 17.85
  4. Book value -$0.84
  5. Dividend yield 5 year Average 9.5%
  6. Dividend rate $1.60
  7. Payout ratio 163%
  8. Dividend growth rate 5 year average 5.00%
  9. Consecutive dividend increases 12 years
  10. Paying dividends since 1990
  11. Total return last 3 years 93%
  12. Total return last 5 years 86%

Conclusion

We have been expecting the markets to start pulling back on the 27th to 29th of this month, and so far they appear to be fulfilling the cycles. In fact, we mentioned this in our several of our recent articles, one of which was published on the 27th, in which we made the following comment:

Going forward, we think that the markets could put in a short term top around the 27-29th of this month. The pullback should provide traders with a good opportunity to open up long positions.

Prior to that we said in the conclusion section of the "best of the best" series published December 16th:

On a short-term basis, the Dow has put in a bottom and is getting ready to challenge the 12,000 ranges again. However, there is a chance that the recent lows could be tested before the rally gathers steam. Going out a little further, the cycles suggest that the Dow should be able to rally until early next year and there is a fairly good chance that the Dow could trade to the 12,800 ranges and the and the SPX could trade to the 1305-1330 plus ranges with the possibility of mounting an intra-day spike to the 1340 ranges. The dollar is overbought and has generated a few sell signals on the hourly time frames, so a pullback, here would help drive commodities and the general market higher.

While we expect the markets to trend higher into the New Year, the ride up is going to be very volatile, and the charts are indicating that the market is close to putting in an important top. Once this topping formation is completed, the markets should experience a very strong pullback, which will at least challenge the October lows; it's possible the Dow and the SPX could slip below them.

This very strong pullback could be viewed as potentially buying opportunity for long-term dividend players. As we get closer to these time lines, we will be in a better position to determine downside targets. For the moment, the SPX is projecting a test of the 1300-1320 range.

All earnings vs. expectation charts were sourced from Smartmoney.com.

Disclaimer: This list of stocks is meant to serve as a starting point. Please do not treat this as a buying list. It is very important that you check the finer details in each of the mentioned plays before investing any capital in them. Some investors are happy taking an enormous amount of risk, while others are bothered by the slightest degree of risk. It is imperative that you do your due diligence and then determine if any of the above plays meet your risk tolerance levels. The Latin maxim caveat emptor applies -- let the buyer beware.

Source: Small Caps With Superior Yields Up To 10.2%