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Market volatility and economic uncertainty is driving more individuals into stocks that pay dividends. Investors who are new to the concept of dividend investing should take the time to understand the following ratios as they could tremendously improve ones long term odds of choosing winning candidates.

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, then they are making; this situation cannot last forever. In general if the company has a high operating cash flow and access to capital markets, they 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 as this cannot last forever; if your tolerance for risk is a low, look for similar companies with the same or higher yields, but with lower payout ratios. Individuals searching for other ideas might find this article to be of interest 7 Candidates With Yields As High As 11.5%.

Debt to equity ratio is found by dividing the company's total amount of long-term debt (debts with interest rates that have a maturity longer than one year) by the total amount of equity. A debt to equity ratio of 0.5 tells us that the company is using 50 cents of liabilities in addition to each $1 dollar of shareholders equity in the business. There is no fixed ideal number as it depends on the industry the company is in. However, in general a ratio under 1 is acceptable and ideally it should be in the 0.5-0.6 ranges.

Current ratio is obtained by dividing the current assets by current liabilities. This ratio allows you to see if the company can pay its current debts without potentially jeopardising their future earnings. Ideally the company should have a ratio of 1 or higher.

Price to free cash flow is obtained by dividing the share price by free cash flow per share. Higher ratios are associated with more expensive companies and vice versa; lower ratios are generally more attractive. If a company generated 400 million in cash flow and then spent 100 million on capital expenditure, then its free flow is $300 million. If the share price is 100 and the free cash flow per share are $5, then company trades at 20 times-free cash flow. This ratio is also useful because it can be used as a comparison to the average within the industry; this gives you an idea of how the company you are interested in holds up to the other companies within the industry.

Interest coverage is usually calculated by dividing the earnings before interest and taxes for a period of 1 year by the interest expenses for the same time period. This ratio informs you of a company's ability to make its interest payments on its outstanding debt. Lower interest coverage ratios indicate that there is a larger debt burden on the company and vice versa.

Our favourite play on this list is Philip Morris International Inc (PM) has a quarterly revenue growth rate of 26.4%, a quarterly earnings growth rate of 30.5%, a ROE of 178%, a three-year dividend growth rate of 23.2%, a total three-year return of 97%, and has been paying dividends since 2008. It has a very strong levered free cash flow rate of $9.62 billion and a current ratio of 0.94.

Important facts investors should be aware in regards to investing in MLPs and REITS

  • Payout ratios are not that important when it comes to MLPS as they are required by law to pay a majority of their cash flow as distributions. Payout ratios are calculated by dividing the dividend/distribution rate by the net income per share, and this is why the payout ratio for MLPs is often higher than 100%. The more important ratio to focus on is the cash flow per unit. If one focuses on the cash flow per unit, one will see that in most cases, it exceeds the distribution declared per unit.
  • MLPs are not taxed like regular corporations because they pay out a large portion of their income to partners (as an investor you are basically a partner and are allocated units instead of shares) usually through quarterly distributions. The burden is thus shifted to the partners who are taxed at their ordinary income rates. As ordinary income tax rates of investors are typically lower than the income tax assessed on corporations, this arrangement is advantageous to the MLPs and generally most investors.
  • MLPs issue a Schedule K-1 to their investors. If the MLP pays out distributions in excess of the income it generates, the distribution is classified as a "return of capital" and tax deferred until you sell your shares or units. Income from MLPs is generally taxable even in retirement accounts like 401KS and IRAs if the income generated is in excess of $1000. For more information, on this topic investors can visit the National Association of Publicly Traded Partnerships.

Three additional plays of interest are Telefonica SA Common Stock (TEF), Philip Morris International Inc and Ameren Corporation Common Stock (AEE) which sport yields of 9.7%, 4.10% and 5.00%, respectively.

TEF has a quarterly revenue growth rate of -16.6%, a ROE of 15.11%, a five-year dividend growth rate of 29.28%, a total three-year return of 19.45%, and a five-year dividend average of 6.5%. It has increased dividends consecutively for 8 years in a row, has a free cash flow rate of $4.2 billion and current ratio of 0.62. A negative factor to consider is that dividend was cut from $1.0733 to $1.0534 and that the quarterly revenue growth rate has turned negative (-16.60%). Only individuals willing to take on a bit of extra risk should consider opening positions in this place; as a hedge if you decide to open a long position sell covered calls.

Net income for the past three years is as follows

  1. 2008= $11 billion
  2. 2009= $11.1 billion
  3. 2010= $13.6 billion

Net income for the past three years is as follows

  1. 2008= $11 billion
  2. 2009= $11.1 billion
  3. 2010= $13.6 billion

Key ratios

  • Price to sale 1.78
  • Price to tangible book 1.69
  • Price to cash flow 8.60
  • Price to free cash flow -47.40
  • 5 year sales growth -2.88%
  • Inventory turnover 8.40
  • Asset turnover 0.30

Philip Morris International Inc has a quarterly revenue growth rate of 26.4%, a quarterly earnings growth rate of 30.5%, a ROE of 178%, a three-year dividend growth rate of 23.2%, a total three-year return of 97%, and has been paying dividends since 2008. It has a very strong levered free cash flow rate of $9.62 billion and a current ratio of 0.94.

Net income for the past three years

2008 = 6.89 billion

2009 = 6.34 billion

2010 = 7.25 billion

Total cash flow from operating activities

2008 = 23.0 billion

2009 = 23.1 billion

2010 = 22.3 billion

Key Ratios

  • P/E Ratio= 15.8
  • Price to Sales= 4.25
  • Price to Book= 60.77
  • Price to Tangible Book=- 11.03
  • Price to Cash Flow= 13.7
  • Price to Free Cash Flow= 23

Ameren Corporation Common Stock , has a quarterly revenue growth rate of -0.10%, a ROE of 6.9%, a price to sales of 0.98, a price to book of 0.95, a total three-year return of 8.48%, a five-year dividend growth rate of -7.68%, a five dividend average of 5.9%, a payout ratio of 69%, and it has been paying dividends since 1906. It has a free cash flow rate of-$585 million, a current ratio of 1.45 and a beta of 0.51. AEE is trading roughly $2 below book value, and the dividend was increased from 38.5 cents to 40 cents.

Net income for the past three years

  1. 2008= 605 million
  2. 2009= $612 million
  3. 2010= $139 million
  4. 2011= It stands at $494 million and could top the $775 million mark.

Total cash flow from operating activities

  1. 2008= 1.5 billion
  2. 2009= $1.97 billion
  3. 2010= $1.84 billion
  4. 2011= It stands at $1.5 billion and could top the $2.29 billion mark.

Important data related to investing in Trusts

  • Cash flow is dependent on the price of the underlying commodity and production levels and thus could be subject to swings. If the swings are wide, the dividends paid out could vary widely from year to year.
  • While investing in royalty trust can yield steady and hefty returns, there is one potential drawback: depletion. These trusts own royalties on a finite amount of resources, and once those resources are gone; the trust is also gone. Investors need to understand that the distributions will eventually decline and disappear. It is essential that you do your due diligence before opening a position in the trusts that are discussed in this article.
  • The problem is that the cash flow is dependent on the price of the underlying commodity and production levels and thus could be subject to swings. If the swings are wide, the dividends paid out could vary widely from year to year.
  • Trusts have no physical operations of their own; they are just financing vehicles that are run by financial institutions such as banks. The resources are mined by other companies, and these companies then pay a royalty on the resources mined to the trust.
  • While investing in royalty trust can yield steady and hefty returns, there is one potential drawback: depletion. These trusts own royalties on a finite amount of resources, and once those resources are gone, the trust is also gone. Most trusts won't likely hit this point for 1-3 decades, but investors need to understand that the distributions will eventually decline and disappear. It is essential that you do your due diligence before opening any positions in the above-mentioned oil trusts.

Stock

Dividend Yield

Market Cap

Forward PE

EBITDA

Quarterly Revenue Growth

Beta

Revenue

Operating Cash flow

ECT

12.00%

372.15M

7.37

N/A

47.80%

N/A

38.09M

N/A

OXF

9.80%

372.95M

15.14

55.68M

23.50%

N/A

389.48M

46.35M

HGT

9.30%

618.80M

N/A

N/A

5.30%

0.92

55.68M

N/A

YPF

8.20%

15.89B

9

3.27B

34.50%

1.16

12.44B

2.88B

ECA Marcellus Trust I

Industry: Holding and other Investment Offices

Net income

2010 = $8.81 million

Key Ratios

P/E Ratio = 9.2

P/E High - Last 5 Yrs = N.A.

P/E Low - Last 5 Yrs = N.A.

Price to Sales = 8.76

Price to Book = 1.18

Price to Tangible Book = 1.18

Price to Cash Flow = 9.2

Price to Free Cash Flow = N.A.

Quick Ratio = 0.7

Current Ratio = 1

LT Debt to Equity = 0

Total Debt to Equity = 0

Interest Coverage = 65536

Inventory Turnover = N.A.

Asset Turnover = 0.1

ROE = N/A

Return on Assets = N/A

200 day moving average = 25.82

Current Ratio = 1.46

Total debt = 0

Book value = 17.83

Qtrly Earnings Growth = 49.4%

Dividend yield 5 year average = N/A

Dividend rate = $ 2.29

Payout ratio = 110%

Consecutive dividend increases = 1 years

Paying dividends since = 2010

Total return last 3 years = N/A

Total return last 3 years = N/A

Potential warning

This is a new trust and has only been paying dividends for a relatively short period of time. Only investors willing to take on a bit more risk should consider this play. On the bright side it does sport a very healthy quarterly earnings growth and revenue rate of 47% and 49% respectively.

Oppenheimer downgraded ECA Marcellus and urged investors to liquidate their positions in the stock, as the firm thinks that 2012 consensus estimates for the name are too high, while the return on investment is unattractive at the current price. Target $20.

Oxford Resource Partners LP

Industry : Mining

Net income for the past two years

2009 = $23.51 million

2010 = $-7.36 million

2011= it stands at -$8 million

Total cash flow from operating activities

2009 = $38.64 million

2010 = $40.27 million

Key Ratios

P/E Ratio = N.A.

P/E High - Last 5 Yrs = N.A.

P/E Low - Last 5 Yrs = N.A.

Price to Sales = 0.93

Price to Book = 5.21

Price to Tangible Book = 5.21

Price to Cash Flow = 8.6

Price to Free Cash Flow = -9.9

Quick Ratio = 0.6

Current Ratio = 0.9

LT Debt to Equity = 1.75

Total Debt to Equity = 1.91

Interest Coverage = N.A.

Inventory Turnover = 25.1

Asset Turnover = 1.5

ROE = -3.62%

Return on Assets = -3.62%

200 day moving average = 65.01K

Current Ratio = 0.93

Total debt = 134.26M

Book value = 3.38

Qtrly Earnings Growth = N/A

Dividend yield 5 year average = 0%

Dividend rate = $ 1.75

Payout ratio = N/A

Dividend growth rate 3 year avg = 0%

Dividend growth rate 5 year avg = 0%

Consecutive dividend increases = 1 years

Paying dividends since = 2010

Total return last 3 years = N/A

Total return last 3 years = N/A

Potential warning

Net income dropped dramatically in 2010 and it looks like it will come in negative for 2011 as well. This is a speculative play.

Hugoton Royalty Trust

Industry : Production & Extraction

Net income for the past three years

2008 = $116.5 million

2009 = $29.31 million

2010 = $62.03 million

2011= It stands at $42 million and could top the $59-63 million ranges.

Key Ratios

P/E Ratio = 10.9

P/E High - Last 5 Yrs = 26.1

P/E Low - Last 5 Yrs = 4.8

Price to Sales = 10.77

Price to Book = 5.1

Price to Tangible Book = 5.1

Price to Cash Flow = 10.9

Price to Free Cash Flow = -31.4

Quick Ratio = N.A.

Current Ratio = N.A.

LT Debt to Equity = 0

Total Debt to Equity = 0

Interest Coverage = N.A.

Inventory Turnover = N.A.

Asset Turnover = 0.4

ROE = 44.63%

Return on Assets = 44.63%

200 day moving average = 21.09

Current Ratio = 1

Total debt = 0

Book value = 2.94

Qtrly Earnings Growth = 5.5%

Dividend yield 5 year average = 9.5%

Dividend rate = $ 1.39

Payout ratio = 102%

Dividend growth rate 3 year avg = 8.9%

Dividend growth rate 5 year avg = 14.19%

Consecutive dividend increases = 0 years

Paying dividends since = 1999

Total return last 3 years = 26.46%

Total return last 3 years = -6.16%

YPF SA

Industry: Refining & Marketing

It has a levered free cash flow rate of -$236 million, a current ratio of 0.85 and a beta of 1.16. It is a good candidate for a covered write. Selling covered calls opens a potential second stream of income and if implemented properly can generate more revenue than the yearly dividend payment.

Net income for the past three years

2008 = $874.67 million

2009 = $971 million

2010 = $1.46 billion

Total cash flow from operating activities

2008 = $3.92 billion

2009 = $2.48 billion

2010 = $3.21 billion

Key Ratios

P/E Ratio = 37

P/E High - Last 5 Yrs = 20.3

P/E Low - Last 5 Yrs = 6.8

Price to Sales = 5.23

Price to Book = 3.28

Price to Tangible Book = 3.28

Price to Cash Flow = 9.6

Price to Free Cash Flow = -18.2

Quick Ratio = 0.5

Current Ratio = 0.9

LT Debt to Equity = 0.18

Total Debt to Equity = 0.51

Interest Coverage = 7.8

Inventory Turnover = 0.7

Asset Turnover = 0.3

ROE = 26.49%

Return on Assets = 26.49%

200 day moving average = 37.03

Current Ratio = 0.85

Total debt = 2.44B

Book value = 12.22

Qtrly Earnings Growth = 14.1%

Dividend yield 5 year average = 9.8%

Dividend rate = $ 3.39

Payout ratio = 287%

Dividend growth rate 3 year avg = -16.75%

Dividend growth rate 5 year avg = 10.25%

Consecutive dividend increases = 1 years

Paying dividends since = 1993

Total return last 3 years = 16%

Total return last 5 years = 28%

Conclusion

For the past few weeks, we have been stating that the SPX would trade to the 1305-1325 ranges with the possibility of spiking as high as 1340 on an intra day basis. To date, the SPX has traded to 1328 so it has hit and exceeded our initial targets; as the markets have a tendency to overshoot it's still possible that the higher target could be hit.

We then went on to state that the markets would put in a short term top. Our view has not changed; we still feel that the markets are going to put in a short term that should lead to a fast and rapid correction. The best long-term gains are achieved when one purchases quality stocks that pay dividends after a market has experienced a strong pull back. Astute investors wait for these moments before they commit large sums of money. In the interim individuals can sell covered calls, and if you are bullish on the stock naked puts to open up additional streams of income.

One year total performance charts sourced from ycharts.com

Dividend history charts sourced from dividata.com

Source: 7 Candidates Sporting Yields As High As 12%