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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 champions.

Free cash flow yield is obtained by dividing free cash flow per share by the current price of each share. Generally lower ratios are associated with an unattractive investment and vice versa. Free cash flow takes into account capital expenditures and other ongoing costs associated with the day to day to functions of the business. In our view, free cash flow yield is a better valuation metric then earnings yield because of the above factor

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.

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 payout ratio over 100% indicates that the company is paying out more money to shareholders than it is making. That's a situation that 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 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: Dividend Champs With Yields As High As 13.6%

Inventory turnover is calculated by dividing sales by inventory. If a company generated $30 million in sales and had an average inventory of $6 million, the inventory turnover would be equal to 5. This value indicates that there are five inventory turnovers per year. This means that it takes roughly 2.4 months to sell the inventory. A low inventory turnover is a sign of inefficiency and vice versa.

Asset turnover is calculated by dividing revenues by assets. It measures a firm's effectiveness at using its assets in generating revenue. Higher numbers are generally better and vice versa. In general, companies with low profit margins have higher asset turnover rates than companies with high profit margins.

Quick ratio or acid test is obtained by adding cash and cash equivalents plus marketable securities and accounts receivable and dividing them by current liabilities. It is a measure of a company's ability to use its quick assets (assets that can be sold off immediately at close to book value) to pay off its current liabilities immediately. A company with a quick ratio of less than 1 cannot pay back its current liabilities.

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. Additional metrics are addressed in this article 5 Plays With Stellar Payment Histories

Our favourite play is Baytex Energy Corp (NYSE:BTE). It has a quarterly earnings growth rate of 34.6%, a quarterly revenue growth rate of, a five-year dividend growth rate of 8.21%, and total return for the past three years of 374%. The only area of concern is the high payout ratio. But as long as the operating cash flow is significantly higher than the amount necessary to cover the dividend payments, BTE should have no problem maintaining its dividend. The operating cash flow for the past 3 years was more than enough to cover the dividend payments. For the past 3 years operating cash flow has ranged from $207-$238 million. Dividend payments in that same time period have ranged from $160-$189 million.

100K invested in BTE would have grown to 331,000 in 7 years

Stock

Dividend Yield

Market Cap

Forward PE

EBITDA

Quarterly Revenue Growth

Beta

Revenue

Operating Cash flow

PWE

5.00%

10.20B

28.85

1.80B

19.70%

1.41

2.85B

1.22B

BTE

4.20%

6.75B

26.14

588.86M

34.60%

1.57

1.02B

501.72M

RCI

3.70%

20.70B

11.77

4.68B

1.20%

0.95

12.40B

3.84B

WBK

7.10%

67.70B

10.59

N/A

3.70%

1.44

16.97B

-12.81B

PBI

7.60%

3.84B

8.89

1.09B

-3.40%

1.01

5.37B

1.04B

Penn West Petroleum Ltd (NYSE: PWE)

Industry: Production & Extraction

Net income for the past three years

2006 = $547.9 million

2007 = $208.17 million

2008 = $-2821.5 million

Total cash flow from operating activities

2006 = $949.32 million

2007 = $1.27 billion

2008 = $1.85 billion

Key Ratios

P/E Ratio = 14.6

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

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

Price to Sales = 2.89

Price to Book = 1.16

Price to Tangible Book = 1.48

Price to Cash Flow = 5.4

Price to Free Cash Flow = -8.9

Quick Ratio = 0.3

Current Ratio = 0.5

LT Debt to Equity = 0.32

Total Debt to Equity = 0.34

Interest Coverage = 3.4

Inventory Turnover = N.A.

Asset Turnover = 0.3

ROE = -2.53%

Return on Assets = 1.77%

200 day moving average = 18.65

Current Ratio = 0.53

Total debt = 3.12B

Book value = 19.58

Qtrly Earnings Growth = -54.6%

Dividend yield 5 year average = 16.7%

Dividend rate = $ 1.08

Payout ratio = 96%

Dividend growth rate 3 year avg = -24.51%

Dividend growth rate 5 year avg = 6.56%

Consecutive dividend increases = 0 years

Paying dividends since = 2005

Total return last 3 years = 102.47%

Total return last 5 years = 15.33%

Baytex Energy Corp

Industry: Production & Extraction

It has a levered free cash flow rate of $5.33 million and a current ratio of .88

Net income for the past three years

2008 = $-222.97 million

2009 = $83.54 million

2010 = $178.77 million

Total cash flow from operating activities

2008 = $385.62 million

2009 = $289.18 million

2010 = $444.26 million

Key Ratios

P/E Ratio = 30.6

P/E High - Last 5 Yrs = 37.6

P/E Low - Last 5 Yrs = 4.3

Price to Sales = 6.01

Price to Book = 6

Price to Tangible Book = 6.2

Price to Cash Flow = 14.6

Price to Free Cash Flow = -47.9

Quick Ratio = 0.7

Current Ratio = 0.9

LT Debt to Equity = 0.56

Total Debt to Equity = 0.56

Interest Coverage = 6.8

Inventory Turnover = 934.1

Asset Turnover = 0.5

ROE = 11.55%

Return on Assets = 8.1%

200 day moving average = 51.28

Current Ratio = 0.88

Total debt = 667.16M

Book value = 10.13

Qtrly Earnings Growth = 122.3%

Dividend yield 5 year average = 11%

Dividend rate = $ 2.64

Payout ratio = 139%

Dividend growth rate 3 year avg = 7.02%

Dividend growth rate 5 year avg = 8.21%

Consecutive dividend increases = 0 years

Paying dividends since = 2003

Total return last 3 years = 374.39%

Total return last 5 years = 306.91%

Positive developments

It has a quarterly earnings growth rate of 122%, a five year dividend growth rate of 8.21% and a 5year dividend average of 11%. Finally, net income has been increasing for the past 3 years in a row.

Rogers Communications Inc. (NYSE: RCI)

Industry : Services

Net income for the past three years

2006 = $669.32 million

2007 = $1.01 billion

2008 = $818.3 million

Total cash flow from operating activities

2006 = $2.12 billion

2007 = $2.88 billion

2008 = $2.71 billion

Key Ratios

P/E Ratio = 13.3

P/E High - Last 5 Yrs = 80

P/E Low - Last 5 Yrs = 8.6

Price to Sales = 1.59

Price to Book = 5.51

Price to Tangible Book = -9.92

Price to Cash Flow = 5.7

Price to Free Cash Flow = 83.4

Quick Ratio = 0.5

Current Ratio = 0.7

LT Debt to Equity = 2.62

Total Debt to Equity = 2.62

Interest Coverage = 4.3

Inventory Turnover = N.A.

Asset Turnover = 0.7

ROE = 39.3%

Return on Assets = 10.43%

200 day moving average = 37.04

Current Ratio = 0.66

Total debt = 10.52B

Book value = 7.15

Qtrly Earnings Growth = 29.2%

Dividend yield 5 year average =2.2%%

Dividend rate = $ 1.42

Payout ratio = 44%

Dividend growth rate 5 year avg = 79%

Consecutive dividend increases = 6 years

Paying dividends since = 2000

Westpac Banking Corp (NYSE: WBK)

Industry : Banking

Net income for the past three years

2009 = $3.05 billion

2010 = $6.15 billion

2011 = $6.8 billion

Total cash flow from operating activities

2009 = $20.6 billion

2010 = $453 million

2011 = $-11676 million

Key Ratios

P/E Ratio = 10.5

P/E High - Last 5 Yrs = 21.4

P/E Low - Last 5 Yrs = 8.3

Price to Sales = 1.65

Price to Book = 1.69

Price to Tangible Book = 2.36

Price to Cash Flow = 10.1

Price to Free Cash Flow = -4.4

Quick Ratio = N.A.

Current Ratio = N.A.

LT Debt to Equity = 3.96

Total Debt to Equity = 3.97

Interest Coverage = 1.3

Inventory Turnover = N.A.

Asset Turnover = 0.1

ROE = 16.82%

Return on Assets = 1.1%

200 day moving average = 106.46

Current Ratio = N/A

Total debt = 241.61B

Book value = 73.88

Qtrly Earnings Growth = -12.7%

Dividend yield 5 year average = 6.7%

Dividend rate = $ 8.03

Payout ratio = 370%

Dividend growth rate 3 year avg = 13.53%

Dividend growth rate 5 year avg = 14.17%

Consecutive dividend increases = 2 years

Paying dividends since = 1990

Total return last 3 years = 167.24%

Total return last 5 years = 49.48%

Pitney Bowes Inc (NYSE: PBI)

Industry : Office Equipment & Furniture

Net income for the past three years

2008 = $419.8 million

2009 = $444.92 million

2010 = $310.71 million

Total cash flow from operating activities

2008 = $990.44 million

2009 = $824.07 million

2010 = $952.12 million

Key Ratios

P/E Ratio = 9.3

P/E High - Last 5 Yrs = 102.1

P/E Low - Last 5 Yrs = 8.6

Price to Sales = 0.72

Price to Book = 0

Price to Tangible Book = -1.53

Price to Cash Flow = 5.4

Price to Free Cash Flow = 6.9

Quick Ratio = 1.1

Current Ratio = 1.2

LT Debt to Equity = 0

Total Debt to Equity = N.A.

Interest Coverage = 5.5

Inventory Turnover = 13

Asset Turnover = 0.7

ROE = 164.71%

Return on Assets = 6.14%

200 day moving average = 19.47

Current Ratio = 1.25

Total debt = 4.25B

Book value = -0.23

Qtrly Earnings Growth = 94.3%

Dividend yield 5 year average = 6.1%

Dividend rate = $ 1.48

Payout ratio = 71%

Dividend growth rate 3 year avg = 1.87%

Dividend growth rate 5 year avg = 2.96%

Consecutive dividend increases = 30 years

Paying dividends since = 1934

Total return last 3 years = 5.74%

Total return last 5 years = -44.37%

Warning

Net income has been dropping for the past three years, though total cash flow from operating activities is still more than enough to cover the dividend payments. It also has a negative quarterly revenue growth rate of -3.4%, but this is somewhat compensated by the strong quarterly earnings growth rate of 94%.

Conclusion

The markets are overbought, and our advice to long term traders would be to wait for a pullback before committing new funds to this market. Our targets for the SPX which were issued six weeks ago have been fulfilled (1305-1325). Dividend investors can sell covered calls and or puts (only if you are bullish on the stock) to open up additional streams of income.

All earnings estimates sources from dailyfinance.com and dividend history charts sourced from dividata.com

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

Disclaimer: This list of stocks is meant to serve as a starting point. Please do not treat this as a buying list. It is imperative that you 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: 5 Dividend Stocks With Yields As High As 7.8%