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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 calculated for hundreds of non-financial companies and combined with other financial metrics to find stocks with attractive dividend prospects. Several criteria were used:

  1. The stock’s dividend payout ratio must be below 100%. This is used as a quick and dirty measure of short-term dividend stability.
  2. Each stock must have positive earnings per share growth over the last five years and is expected by analysts to have positive earnings per share growth over the next five years. This criterion is a metric of long-term dividend growth.
  3. Dividend yields are in excess of the 10-year treasury yield (currently about 2%)
  4. Each stock scored in the “safe” zone according to the Altman Z-score.

Companies that met these criteria are presented below:

Ticker

Company

Dividend Yield

P/E

Payout Ratio

Altman Z-score

CTCM

CTC Media, Inc

9.7%

9.4

94.4%

6.48

SCCO

Southern Copper Corp.

7.9%

11.5

80.9%

7.44

CHT

Chunghwa Telecom Co. Ltd.

5.8%

18.2

88.9%

6.32

HRB

H&R Block, Inc.

4.9%

12.2

44.6%

3.13

LEG

Leggett & Platt, Incorporated

4.9%

19.1

88.1%

3.85

ELRC

Electro Rent Corp.

4.7%

15.9

65.3%

5.40

AM-OLD

American Greetings Corp.

4.6%

6.5

28.7%

3.19

LO

Lorillard, Inc.

4.6%

15.4

67.5%

7.38

NTRI

Nutrisystem, Inc.

4.6%

21.3

98.1%

9.07

EBF

Ennis Inc.

4.5%

9.4

42.5%

4.23

LDR

Landauer Inc.

4.2%

20.1

85.0%

5.23

PAYX

Paychex, Inc.

4.2%

20.7

84.0%

3.38

STRA

Strayer Education Inc.

4.1%

10.5

43.8%

9.86

GRMN

Garmin Ltd.

4.1%

15.7

79.5%

5.53

PM

Philip Morris International

4.0%

16.3

56.9%

6.43

MCHP

Microchip Technology Inc.

3.9%

17.4

63.5%

5.94

VICR

Vicor Corp.

3.9%

17.1

33.1%

10.04

CATO

Cato Corp.

3.9%

11.1

38.0%

6.09

DRI

Darden Restaurants, Inc.

3.9%

13.6

44.4%

3.34

HAS

Hasbro Inc.

3.8%

11.0

38.6%

3.84

SYY

Sysco Corp.

3.7%

14.8

52.7%

6.75

CMTL

Comtech Telecommunications

3.7%

15.7

46.4%

3.63

CPB

Campbell Soup Co.

3.7%

13.1

48.7%

4.65

CAG

ConAgra Foods, Inc.

3.6%

15.4

0.0%

3.17

HNZ

H. J. Heinz Company

3.6%

17.9

62.7%

3.39

RYN

Rayonier Inc.

3.6%

20.2

65.0%

4.55

JNJ

Johnson & Johnson

3.5%

15.8

53.3%

4.50

SON

Sonoco Products Co.

3.5%

15.2

51.2%

3.49

NOC

Northrop Grumman Corporation

3.5%

9.4

30.9%

3.06

ABT

Abbott Laboratories

3.4%

19.3

64.2%

3.07

K

Kellogg Company

3.4%

15.6

37.5%

3.43

EMR

Emerson Electric Co.

3.4%

14.5

42.3%

4.22

MXIM

Maxim Integrated Products

3.4%

15.6

49.6%

7.23

INTC

Intel Corporation

3.3%

10.9

30.3%

5.54

MAT

Mattel Inc.

3.3%

13.9

74.1%

5.02

SHLM

A. Schulman, Inc.

3.2%

15.9

47.3%

3.50

FLO

Flowers Foods, Inc.

3.2%

19.3

58.4%

4.53

MOLX

Molex Inc.

3.2%

14.3

43.2%

4.90

MEI

Methode Electronics Inc.

3.2%

19.4

60.7%

4.14

LLTC

Linear Technology Corp.

3.2%

12.7

39.1%

6.00

PFCB

P.F. Chang's China Bistro, Inc.

3.2%

17.6

50.4%

4.61

BMS

Bemis Company, Inc.

3.2%

15.3

48.9%

3.09

BRKS

Brooks Automation Inc.

3.2%

5.1

4.1%

3.12

PG

Procter & Gamble Co.

3.2%

16.8

48.6%

3.23

PEP

Pepsico, Inc.

3.2%

16.4

49.3%

3.21

PKG

Packaging Corp. of America

3.1%

15.1

43.8%

3.35

ENB

Enbridge Inc.

3.0%

31.2

80.1%

4.58

ITW

Illinois Tool Works Inc.

3.0%

12.1

34.5%

4.21

CVX

Chevron Corporation

3.0%

8.0

22.2%

4.55

KLAC

KLA-Tencor Corporation

2.9%

9.8

22.1%

5.84

AMAT

Applied Materials

2.9%

7.6

21.2%

5.01

GPC

Genuine Parts Company

2.9%

17.8

51.5%

5.85

WDFC

WD-40 Company

2.9%

18.6

49.8%

7.97

ASEI

American Science & Engineering

2.9%

18.8

32.3%

8.07

BOBE

Bob Evans Farms Inc.

2.9%

16.3

39.8%

4.41

JCOM

j2 Global, Inc.

2.9%

11.9

8.6%

10.19

OMI

Owens & Minor Inc.

2.9%

15.7

43.1%

6.61

MSFT

Microsoft Corporation

2.9%

10.2

24.4%

4.98

NHC

National Healthcare Corp.

2.8%

10.6

28.4%

3.34

UPS

United Parcel Service, Inc.

2.8%

17.8

49.8%

4.38

CTB

Cooper Tire & Rubber Co.

2.8%

11.1

30.7%

3.17

ADI

Analog Devices Inc.

2.8%

12.9

32.7%

7.37

MCD

McDonald's Corp.

2.8%

19.7

47.3%

6.43

KRO

Kronos Worldwide Inc.

2.8%

9.2

44.8%

3.71

SPLS

Staples, Inc.

2.8%

10.6

28.0%

4.07

KO

The Coca-Cola Company

2.7%

12.7

33.3%

4.10

SWY

Safeway Inc.

2.7%

14.3

36.5%

4.28

WAG

Walgreen Co.

2.7%

11.2

26.6%

5.69

APD

Air Products & Chemicals

2.7%

15.4

39.0%

3.31

PPG

PPG Industries Inc.

2.7%

12.6

33.0%

3.25

GES

Guess' Inc.

2.7%

10.2

96.6%

6.17

BAX

Baxter International Inc.

2.7%

13.3

32.4%

3.81

KOP

Koppers Holdings Inc.

2.7%

12.3

32.3%

3.71

BBY

Best Buy Co. Inc.

2.6%

8.5

20.6%

4.03

MMM

3M Co.

2.6%

14.2

36.2%

5.35

CMP

Compass Minerals International

2.6%

13.8

35.5%

4.38

MANT

ManTech International

2.6%

8.6

22.6%

3.89

SNA

Snap-on Inc.

2.6%

11.7

22.7%

3.06

ACN

Accenture plc

2.6%

14.6

33.5%

5.50

UTX

United Technologies Corp.

2.6%

13.9

34.0%

3.22

CL

Colgate-Palmolive Co.

2.6%

18.1

44.2%

6.55

FCX

Freeport-McMoRan Copper & Gold

2.6%

6.8

34.7%

3.45

CEC

CEC Entertainment Inc.

2.6%

12.3

21.3%

3.60

GPS

Gap Inc.

2.5%

10.5

24.2%

6.24

WPO

The Washington Post Company

2.5%

22.6

54.1%

3.11

MDT

Medtronic, Inc.

2.5%

12.3

29.3%

3.48

NAFC

Nash Finch Co.

2.5%

8.5

19.6%

5.60

WMT

Wal-Mart Stores Inc.

2.5%

13.3

31.1%

4.07

BDX

Becton, Dickinson and Company

2.5%

13.0

28.3%

4.61

MKC

McCormick & Co. Inc.

2.5%

18.0

39.6%

3.91

STJ

St. Jude Medical Inc.

2.4%

12.6

22.6%

3.42

ADM

Archer Daniels Midland

2.4%

8.9

18.9%

3.66

EAT

Brinker International Inc.

2.4%

16.3

34.2%

5.47

MTSC

MTS Systems Corp.

2.4%

13.1

25.9%

4.48

XLNX

Xilinx Inc.

2.4%

14.6

31.0%

4.95

ROK

Rockwell Automation Inc.

2.4%

15.1

30.4%

4.75

IFF

Intl Flavors & Fragrances

2.3%

14.5

30.3%

4.51

KWR

Quaker Chemical Corporation

2.3%

12.3

42.1%

3.84

AVX

AVX Corp.

2.3%

8.6

14.1%

8.35

KAMN

Kaman Corporation

2.3%

13.6

28.1%

3.84

TXN

Texas Instruments Inc.

2.3%

12.4

21.2%

5.33

HSY

Hershey Co.

2.3%

22.5

48.0%

6.53

AZZ

AZZ Incorporated

2.2%

15.0

33.0%

3.26

GLW

Corning Inc.

2.2%

6.4

9.3%

3.44

XOM

Exxon Mobil Corporation

2.2%

10.3

22.0%

5.03

SXT

Sensient Technologies

2.2%

16.2

35.2%

4.44

CR

Crane Co.

2.2%

14.9

28.9%

3.13

MHP

The McGraw-Hill Companies

2.2%

16.6

34.9%

4.74

CBE

Cooper Industries plc

2.2%

14.4

30.0%

4.16

TUP

Tupperware Brands

2.2%

16.7

35.1%

4.12

KSS

Kohl's Corp.

2.2%

11.0

22.7%

3.76

MKSI

MKS Instruments Inc.

2.2%

10.4

16.7%

10.24

VFC

V.F. Corporation

2.2%

21.6

40.2%

3.21

CY

Cypress Semiconductor

2.1%

22.4

20.2%

4.69

BMI

Badger Meter Inc.

2.1%

18.8

36.1%

10.51

LANC

Lancaster Colony Corporation

2.1%

18.1

34.6%

15.71

TXRH

Texas Roadhouse Inc.

2.1%

18.1

27.6%

5.66

AIT

Applied Industrial Technologies

2.1%

15.3

29.8%

8.13

CVGW

Calavo Growers Inc.

2.1%

31.7

66.5%

5.01

IPAR

Inter Parfums Inc.

2.1%

13.7

27.0%

3.65

CAH

Cardinal Health, Inc.

2.1%

16.1

30.7%

5.59

HRL

Hormel Foods Corp.

2.1%

16.7

28.7%

6.61

TLAB

Tellabs Inc.

2.1%

0.0

0.0%

3.10

TSS

Total System Services, Inc.

2.1%

18.0

26.1%

7.03

LII

Lennox International, Inc.

2.0%

19.2

36.7%

3.64

The companies on this list offer attractive dividend yields and have a low probability of bankruptcy. Thus, they offer good chances for attractive risk-adjusted returns. Dividend investors ought to scan this list for additional stocks to add to their dividend portfolios.

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.

*“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.

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

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: 2012's Top Dividend Stocks To Beat Treasuries