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In part I we looked at five stocks with stellar payment histories and with dividend yields as high as 8%. Dividend investors generally hold for the long haul and the best time to commit large amounts of money is after the market has experienced a strong pullback. Novice players should take the time to understand what they are getting into and study some of the key metrics provided below. One should never open up a position based on high yields only.

Key metrics such as operating cash flow, levered free cash flow and payout ratios have been provided as this data could prove to be useful in a selection process.

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 stocks that offer significantly higher yields but with a slight increase in risk might be interested in this article 4 MLPS offering excellent yields.

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% means that the company is paying out more money to shareholders then it is making. This situation cannot last forever. In general if a company has a high operating cash flow and access to capital markets, it can keep this going on for a while. Companies only pay the portion of the debt that is coming due and not the whole debt so using this technique they can maintain and even increase dividend payments for sometime.

Two techniques can be used to somewhat minimize the risk during such volatile times. One strategy is to sell covered calls. The premium you can earn effectively lowers your net cost. Another good technique is to sell naked put options. This technique should only be used if you are bullish on the stock and have the money to purchase the shares you are assigned if the stock trades at or below the strike price. The trick is to sell out of the money puts. Now if this does not trade below the strike price, then you will walk away with the premium. If it does trade at the strike price, you get to buy the stock you wanted to buy but at a much lower cost as you were paid a premium for each of the puts you sold. For example, if you sold the Leggett & Platt (NYSE:LEG) June 20 put for 1.00 and stock trades below 20 on the last trading day, then you will be assigned the shares at $20. Your net cost though would be $19.00.70 (20.00-1.00). This technique works great on stocks with a high beta as you are able to charge significantly higher premiums.

Our favorite play is ADP (NASDAQ:ADP). It has a decent yield of 4.8%, a quarterly revenue growth (year over year) of 8.6%, a a ROE of 12.67%, a five-year dividend growth rate of 10.86%, a total return of 67% for the past three years, and has been paying dividends since 1939. It has a levered free cash flow rate of $218 million. Net income has been increasing nicely for the past three years and it looks like net income will rise again in 2011. In 2008, net income came in at $104 million, in 2009 it was $ 111 million and in 2010, net income came in at $176 million. For 2011, net income so far stands at $144 million, and if it maintains this pace, it could finish the year with a net income in excess of $189 million.

Three other interesting plays are Procter & Gamble (NYSE:PG), Abbott Laboratories (NYSE:ABT) and Corning, Inc (NYSE:GLW) with yields of 3.10%, 3.30% and 2.3% respectively.

Procter & Gamble has been paying dividends for over 120 years, has consecutively increased its dividends for 58 years. It has a decent revenue growth rate of 8.9%, a ROE of 19.23%, a very decent five-year dividend growth rate of 11.21% and a total return for the past three of 18.5%. Lastly, it sports a solid levered free cash flow rate of $7.66 billion. It has a massive levered free cash flow rate of $7.66 billion. Net income has been dropping for the past three years. In 2008, it was at $13.4 billion; in 2009, it was at $12.73 billion and in 2010, net income was $11.79 billion. For 2011, the net income so far is roughly $8.3 billion. The only negative is that net income for the past two years has been dropping, but it generates so much cash that it should have no problem making its dividend payments for years to come.

Abbott Laboratories has an enterprise value of $96.34 billion, a quarterly revenue growth rate of 13.2%, a ROE of 19,71%, a five-year dividend growth rate of 10.14.%, a five-year dividend average of 2.9%, a total three-year return of 16.38% and has been paying dividends since 1926. It has a levered free cash flow rate of $9.06 billion. Net income for the past three years is as follows: In 2008, it came in at $4.8 billion, in 2009 moved up to $5.7 billion and in 2010, it dropped even down to $4.6 billion. Net income for 2011 so far stands at $3.3 billion.

Corning, Inc has an enterprise value of $16.3 billion, a quarterly revenue growth rate of 29.5%, a ROE of 16.7%, a beat of 1.3, a five-year dividend growth rate of 10.14.%, a three-year dividend average of 4.17%, a total three-year return of 35.97% and has been paying dividends since 1990. It has an operating cash flow rate of $4.12 billion. Net income for the past three years is as follows: In 2008, net income was $5.00 billion, in 2009 dropped down to $2.8 billion and in 2010, it moved up to $3.55 billion. Net income for 2011 so far stands at $2.3 billion.

Stock

Dividend

Market Cap

Forward

PE

EBITDA

Quarterly Revenue growth

Beta

Revenue

Cash flow

LEG

4.8%

3.25B

16.44

391.40M

8.60%

1.27

3.58B

356M

ED

4.00%

17.54

16

3.15B

-2.10%

0.24

13.11B

3.57B

ADP

2.7%

26.5B

17

2.17B

13.10%

0.74

10.17B

1.8B

ORI

7.6%

2.37B

61

-255.5M

12.9%

0.88

4.5B

-236M

B= Billion M= Million

Leggett & Platt, Inc.

It has an enterprise value of $3.93 billion, a quarterly revenue growth (year over year ) of 8.6%, a quarterly earnings growth of -3.0%, a ROE of 12.67%, a five-year dividend growth rate of 10.86%, a total return of 67% for the past three years, and has been paying dividends since 1939. It has a levered free cash flow rate of $218 million.

Net income for the past three years is as follows. In 2008, it was $104 million, in 2009 it was $ 111 million and in 2010, net income came in at $176 million. For 2011, net income so far stands at $144 million, and if it maintains this pace, it could finish the year with a net income in excess of $189 million. LEG has a fairly high beta so it's a good candidate for selling covered calls on. Stocks with high betas usually command higher option premiums.

Key ratios

  1. Price to tangible book 12.21
  2. Price to cash flow 10.80
  3. Price to free cash flow 30.40
  4. 5 year sales growth -9.28
  5. Inventory turnover 6.20
  6. Asset turnover 1.20

  1. ROE 12.60%
  2. Return on assets 5.56%
  3. 200 day moving average $21.21
  4. Total debt $928 million
  5. Book value $9.55
  6. Dividend yield 5 year Average 5.10%
  7. Dividend rate $1.12
  8. Payout ratio 92%
  9. Dividend growth rate 5 year average 10.86%
  10. Consecutive dividend increases 40 years
  11. Paying dividends since 1939
  12. Total return last 3 years 67%
  13. Total return last 5 year 19%

Consolidated Edison, Inc.

It has an enterprise value of $28.05 billion, a quarterly revenue growth (year over year ) of -2.10%, a quarterly earnings growth of 9.4%, a ROE of 9.7%, a five-year dividend growth rate of 0.85%, a total return of 72% for the past three years, and has been paying dividends since 1885. It has a levered free cash flow rate of $900 million.

Net income for the past three years is as follows. In 2008, it was $1.19 billion, in 2009 it was $879 million and in 2010, net income came in at $1.0 billion. For 2011, net income so far stands at $869 million.

Key ratios

  1. Price to tangible book 1.58
  2. Price to cash flow 9.00
  3. Price to free cash flow 21.10
  4. 5 year sales growth 1.25%
  5. Inventory turnover 22.00
  6. Asset turnover 0.40

  1. ROE 9.71%
  2. Return on assets 3.95%
  3. 200 day moving average $ 56.46
  4. Total debt $10.68B
  5. Book value $39.11
  6. Dividend yield 5 year Average 4.90%
  7. Dividend rate $2.40
  8. Payout ratio 64%
  9. Dividend growth rate 5 year average 0.85%
  10. Consecutive dividend increases 37 years
  11. Paying dividends since 1885
  12. Total return last 3 years 72%
  13. Total return last 5 year 49%

Automatic Data Processing Inc.

It has an enterprise value of $25.38 billion, a quarterly revenue growth (year over year ) of 13.10%, a quarterly earnings growth of 8.7%, a ROE of 21.7%, a five-year dividend growth rate of 13.75%, a total return of 45% for the past three years, and has been paying dividends since 1974. It has a strong levered free cash flow rate of $1.38 billion.

Net income for the past three years is as follows. In 2008, it was $1.3 billion, in 2009 it was $1.2 billion and in 2010, net income came in at $1.25 billion. For 2011, net income so far stands at $968 million. ADP increased its dividend from 36 cents to 39.50 cents.

Key ratios

  1. Price to tangible book 11.40
  2. Price to cash flow 16.10
  3. Price to free cash flow 51.40
  4. 5 year sales growth 2.90
  5. Inventory turnover N/A
  6. Asset turnover 0.30

  1. ROE 21.71%
  2. Return on assets 3.93%
  3. 200 day moving average $ 50.72
  4. Total debt $36M
  5. Book value $12.33
  6. Dividend yield five-year average 2.80%
  7. Dividend rate $1.58
  8. Payout ratio 57%
  9. Dividend growth rate 5 year average 13.75%
  10. Consecutive dividend increases 36 years
  11. Paying dividends since 1974
  12. Total return last 3 years 45%
  13. Total return last 5 year 39%

Old Republic International Corp.

It has an enterprise value of $1.86 billion and price/sales value of 0.63. It has a quarterly revenue growth (year over year) of 12.9%, a five-year dividend growth rate of 3.52%, an anaemic total return of 5.25% for the past three years, and has been paying dividends since 1942. It has a rather large negative levered free cash flow rate of -$1.18 billion. ORI is trading $6 below book value. Old Republic International Corp sports the following per share data. Earnings -.082, Sales 17.41 and Cash Flow -0.81.

After dropping for two years in a row, net income is started to rise again. In 2008, it was -$558 million, in 2009 it was -$99 million and in 2010, net income turned positive to $30.1 million. For 2011, things are not looking bright. So far, it stands at - $194 million.

Potential negative developments:

Old Republic International Corp sports a very high payout ratio of 532%. Investors should monitor this closely for this trend is not sustainable. If the ratio does not start to drop, ORI might be forced to cut its dividend. It also sports a very high forward PE of 61.

Key ratios

  1. Price to tangible book 5.23
  2. Price to cash flow 10.40
  3. Price to free cash flow -6.10
  4. 5 year sales growth 11.62%
  5. Inventory turnover 29.10
  6. Asset turnover 0.90

  1. ROE -5.32%
  2. Return on assets -1.15%
  3. Total debt $912M
  4. 200 day moving average $9.64
  5. Book value $14.98
  6. Dividend yield 5 year Average 5.90%
  7. Dividend rate $ 0.70
  8. Payout ratio 532%
  9. Dividend growth rate five-year average 3.51%
  10. Consecutive dividend increases 30 years
  11. Paying dividends since 1942
  12. Total return last 3 years 5.26%
  13. Total return last 5 year -45%

All earnings vs. expectations graphs/data were sourced from smartmoney.com.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: 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, do your due diligence and then determine if any of the above plays meet with your risk tolerance levels. The Latin maxim caveat emptor applies-let the buyer beware.

Source: Dividend Aristocrats With Great Yields Part II