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Market volatility and economic uncertainty are 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 prove to be very useful in spotting future winners.

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.

The payout ratio tells us what portion of the profit is being returned to investors. A payout 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 Sporting Yields As High As 12%

Turnover Ratio lets you know the number of times a company's inventory is replaced in a given time period. It is calculated by dividing the cost of goods sold by average inventory during the time period studied. A high turn over ratio indicates that a company is producing and selling its good and services very quickly.

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.

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 favorite play on this list is Holly Energy Partners LP (NYSE:HEP). It has a ROE of 67.4%, a quarterly revenue growth rate of 5.8%, a five year dividend average of 7.5%, a 5 year dividend growth rate of 5.89%, it has consecutively increased dividends for 7 year, and the total return for the past three is 122%. It has increased its dividend from 87.5 cents to 88.5 cents.

Investors willing to take on some risk might be interested in MCG Capital (NASDAQ:MCGC); it sports a high beta so it's a good candidate for covered writes. After dipping in 2009 dividends are on the rise again. It has a very strong 3 year return in excess of 500%, a three year average dividend growth rate of 16.99% and its trading roughly $1.65 below book value.

Important facts investors should be aware of in regards to investing in MLPs

  • 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.

Stock

Dividend Yield

Market Cap

Forward PE

EBITDA

Quarterly Revenue Growth

Beta

Revenue

Operating Cash flow

CPNO

6.80%

2.22B

36.79

141.24M

48.80%

0.49

1.25B

151.90M

E

4.60%

80.32B

8.93

33.17B

14.20%

1.18

142.11B

18.80B

BAK

5.80%

7.34B

23.28

2.30B

15.10%

1.46

17.85B

1.77B

HEP

6.40%

1.20B

18.43

133.30M

5.80%

0.34

194.59M

99.68M

MCGC

13.60%

369.04M

7.98

65.55M

-8.20%

2.04

89.71M

41.74M

Copano Energy LLC (NASDAQ:CPNO)

Industry: Equipment & Services

It has a levered free cash flow rate of $-62 million and a current ratio of 0.9.

Net income for the past three years

  • 2008 = $58.22 million
  • 2009 = $23.16 million
  • 2010 = $-8.69 million

Total cash flow from operating activities

  • 2008 = $89.93 million
  • 2009 = $141.32 million
  • 2010 = $123.6 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 = 1.78
  • Price to Book = 3.58
  • Price to Tangible Book = 5.05
  • Price to Cash Flow = -19.8
  • Price to Free Cash Flow = -10

  • Quick Ratio = 0.8
  • Current Ratio = 0.9
  • LT Debt to Equity = 1.46
  • Total Debt to Equity = 1.46
  • Interest Coverage = N.A.
  • Inventory Turnover = N.A.
  • Asset Turnover = 0.6
  • ROE = -14.95%
  • Return on Assets = 2.33%
  • 200 day moving average = 32.57
  • Current Ratio = 0.9
  • Total debt = 909.13M
  • Book value = 9.37
  • Qtrly Earnings Growth = N/A

  • Dividend yield 5 year average = 8.3%
  • Dividend rate = $ 2.30
  • Payout ratio = 920%
  • Dividend growth rate 3 year avg = 2%
  • Dividend growth rate 5 year avg = 13.16%
  • Consecutive dividend increases = 0 years
  • Paying dividends since = 2005
  • Total return last 3 years = 158.89%
  • Total return last 5 years = 43.76%

ENI S.p.A. (NYSE:E)

Industry: Production & Extraction

It has a levered free cash flow rate of $140 million and a current ratio of 1.05.

Net income for the past three years

  • 2008 = $13.48 billion
  • 2009 = $7.63 billion
  • 2010 = $9.91 billion

Total cash flow from operating activities

  • 2008 = $30.74 billion
  • 2009 = $15.98 billion
  • 2010 = $19.72 billion

Key Ratios

  • P/E Ratio = 13.2
  • P/E High - Last 5 Yrs = 15.8
  • P/E Low - Last 5 Yrs = 5.2
  • Price to Sales = 0.75
  • Price to Book = 1.14
  • Price to Tangible Book = 1.43
  • Price to Cash Flow = 4
  • Price to Free Cash Flow = -19.8

  • Quick Ratio = 0.7
  • Current Ratio = 1
  • LT Debt to Equity = 0.44
  • Total Debt to Equity = 0.56
  • Interest Coverage = 3.4
  • Inventory Turnover = 7.1
  • Asset Turnover = 0.6
  • ROE = 12.76%
  • Return on Assets = 7.99%
  • 200 day moving average = 40.76
  • Current Ratio = 1.05
  • Total debt = 39.16B
  • Book value = 38.41
  • Qtrly Earnings Growth = 2.7%

  • Dividend yield 5 year average = 5.4%
  • Dividend rate = $ 2.05
  • Payout ratio = 90%
  • Dividend growth rate 3 year avg = -18.54%
  • Dividend growth rate 5 year avg = 4.45%
  • Consecutive dividend increases = 1 years
  • Paying dividends since = 1996
  • Total return last 3 years = 13.94%
  • Total return last 5 years = -12.46%

Warning

Dividend was cut slightly from $1.029 to 1.0195.

Braskem SA (NYSE:BAK)

Industry: Refining & Marketing

It has a levered free cash flow rate of $716 million and a current ratio of 1.15.

Net income for the past three years

  • 2008 = $-1.07 billion
  • 2009 = $228.6 million
  • 2010 = $1.14 billion

Total cash flow from operating activities

  • 2008 = $1.13 billion
  • 2009 = $343.43 million
  • 2010 = $1.64 billion

Key Ratios

  • P/E Ratio = 5.8
  • P/E High - Last 5 Yrs = N.A.
  • P/E Low - Last 5 Yrs = N.A.
  • Price to Sales = 0.37
  • Price to Book = 1.32
  • Price to Tangible Book = 1.9
  • Price to Cash Flow = 3.9
  • Price to Free Cash Flow = -15.1

  • Quick Ratio = 0.8
  • Current Ratio = 1.1
  • LT Debt to Equity = 1.29
  • Total Debt to Equity = 1.43
  • Interest Coverage = 1.4
  • Inventory Turnover = 8.5
  • Asset Turnover = 1
  • ROE = 0.42%
  • Return on Assets = 4.09%
  • 200 day moving average = 18.41
  • Current Ratio = 1.15
  • Total debt = 8.17B
  • Book value = 14.13
  • Qtrly Earnings Growth = N/A

  • Dividend yield 5 year average = 4.3%
  • Payout ratio = 34254%
  • Dividend growth rate 5 year avg = N/A
  • Consecutive dividend increases = 0 years
  • Total return last 3 years = 258.74%
  • Total return last 5 years = 33.1%

Holly Energy Partners LP (HEP)

Industry: Equipment & Services

It has a levered free cash flow rate of $22.2 million and a current ratio of 1.39.

Net income for the past three years

  • 2008 = $25.37 million
  • 2009 = $66.02 million
  • 2010 = $58.87 million

Total cash flow from operating activities

  • 2008 = $63.66 million
  • 2009 = $68.2 million
  • 2010 = $103.17 million

Key Ratios

  • P/E Ratio = 21.7
  • P/E High - Last 5 Yrs = 35.1
  • P/E Low - Last 5 Yrs = 8.7
  • Price to Sales = 6.13
  • Price to Book = 12.56
  • Price to Tangible Book = -20.78
  • Price to Cash Flow = 12.4
  • Price to Free Cash Flow = -30.9

  • Quick Ratio = 1.3
  • Current Ratio = 1.4
  • LT Debt to Equity = 5.63
  • Total Debt to Equity = 5.63
  • Interest Coverage = 3
  • Inventory Turnover = N.A.
  • Asset Turnover = 0.3
  • ROE = 67.4%
  • Return on Assets = 9.82%
  • 200 day moving average = 52.75
  • Current Ratio = 1.39
  • Total debt = 542.28M
  • Book value = 11.22
  • Qtrly Earnings Growth = -2.7%

  • Dividend yield 5 year average = 7.5%
  • Dividend rate = $ 3.48
  • Payout ratio = 138%
  • Dividend growth rate 3 year avg = 5.14%
  • Dividend growth rate 5 year avg = 5.89%
  • Consecutive dividend increases = 7 years
  • Paying dividends since = 2004
  • Total return last 3 years = 122.15%
  • Total return last 5 years = 65.84%

Positive development

Dividend was increased from 87.50 cents to 88.50 cents.

MCG Capital Corp (MCGC)

Industry: Finance Intermediaries & Services

It has a levered free cash flow of $48.2 million and a current ratio of 1.83

Net income for the past three years

  • 2008 = $-191.25 million
  • 2009 = $-51.06 million
  • 2010 = $-13.08 million

Total cash flow from operating activities

  • 2008 = $150.46 million
  • 2009 = $179.2 million
  • 2010 = $-35.79 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 = 4.17
  • Price to Book = 0.75
  • Price to Tangible Book = 0.75
  • Price to Cash Flow = -6
  • Price to Free Cash Flow = 25.3

  • Quick Ratio = N.A.
  • Current Ratio = N.A.
  • LT Debt to Equity = 0.83
  • Total Debt to Equity = 0.99
  • Interest Coverage = N.A.
  • Inventory Turnover = N.A.
  • Asset Turnover = 0.1
  • ROE = -11.23%
  • Return on Assets = 3.6%
  • 200 day moving average = 4.52
  • Current Ratio = 1.83
  • Total debt = 490.02M
  • Book value = 6.45
  • Qtrly Earnings Growth = N/A

  • Dividend yield 5 year average = 38.2%
  • Dividend rate = $ 0.68
  • Dividend growth rate 3 year avg = 16.99%
  • Dividend growth rate 5 year avg = 9.18%
  • Consecutive dividend increases = 1 years
  • Paying dividends since = 2002
  • Total return last 3 years = 568.18%
  • Total return last 5 years = -56.69%

Warnings

This is a volatile stock, and only individuals willing to take on a bit of risk should consider this play.

Positive factors

It sports a high beta, so it's a good candidate for covered writes. After dipping in 2009 dividends are on the rise again. It has a very strong 3 year return in excess of 500%, a three year average dividend growth rate of 16.99% and it's trading roughly $1.65 below book value.

Conclusion

The markets are overbought now, and the best course of action for long term dividend players would be to wait for a pullback before deploying new funds into the market. In the mean time, long term investors can sell covered calls to open up a second stream of income. One can also sell naked puts to open up another stream of income, but this strategy should only be employed if you are bullish on the stock.

Dividend history charts sourced from dividata.com; growth of $10,000 charts sourced from Morningstar.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. The Latin maxim caveat emptor applies -- let the buyer beware.

Source: Dividend Champs With Yields As High As 13.6%