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Extreme 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; they could prove to be immensely useful in the selection process and improve one's odds of choosing winning candidates.

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; this situation 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 some time. Individuals searching for other ideas might find this article to be of interest: 5 Dividend Stocks With Yields As High As 7.8%

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 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 jeopardizing their future earnings. Ideally the company should have a ratio of 1 or higher.

Price to cash flow ratio is obtained by dividing the share price by cash flow per share. It is a measure of the market's expectations of a company's future financial health. The effects of depreciation and other non cash factors are removed, and this makes it easier for investors to assess foreign companies in the same industry. This ratio also provides a measure of relative value like the price to earning's ratio.

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. Additional key metrics are addressed in this article: 5 Dividend Champs With Yields As High As 17%

Our favorite play on the list is Plains All American Pipelines, (PAA) and we like it for the following reasons:

  • A very strong and healthy levered free cash flow of $849 million
  • A stellar quarterly earnings growth rate of 246%
  • A five year dividend growth rate of 5.86%
  • A five year dividend average of 6.7%
  • A ROE of 17.34%
  • Net income has exploded in 2011 and could come in 100% higher than 2010.
  • Operating cash flow has also exploded upwards. In 2010 it stood at $259 million. It is already at $1.7 billon and could easily top the $2 billion mark.
  • It increased the quarterly distribution from 99.5 cents to $1.025 per unit.
  • Consecutive dividend increases for 12 years going on 13.

100K invested for 10 years in PAA would have grown to 398,489.

Key data investors should be aware of in regard to investing in MLPs and REITS.

Payout ratios are not that important when it comes to REITs, as they are required by law to pay a majority of their cash flow as dividends. Payout ratios are calculated by dividing the dividend rate by the net income per share, and this is why the payout ratio for REITs is often higher than 100%. The more important ratio to focus on is the cash flow per share. If one focuses on the cash flow, one will see that in most cases, it exceeds the dividend declared per share.

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. Unrelated business income (UBI) above $1,000 is taxable in an IRA. This information will appear in Box 20 in the schedule K-1. UBI is typically a very small number; usually well below $1,000 and in some cases negative. 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 units. 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

OHI

7.60%

2.16B

10.81

253.82M

4.40%

0.98

283.31M

176.14M

CTL

7.80%

23.25B

14.65

5.54B

162.90%

0.73

12.42B

4.04B

PAA

5.00%

11.49B

17.73

1.40B

37.80%

0.48

32.62B

1.55B

SPH

7.90%

1.53B

12.8

180.86M

8.10%

0.40

1.19B

132.79M

GTY

8.70%

569.37M

9.17

62.39M

27.70%

1.01

103.52M

66.71M

Omega Healthcare Investors, In (OHI)

Industry: REITs

Net income for the past three years

  • 2008 = $78.14 million
  • 2009 = $82.12 million
  • 2010 = $58.44 million

Total cash flow from operating activities

  • 2008 = $89.33 million
  • 2009 = $147.23 million
  • 2010 = $157.57 million

Key Ratios

  • P/E Ratio = 71.9
  • P/E High - Last 5 Yrs = 46.1
  • P/E Low - Last 5 Yrs = 10
  • Price to Sales = 7.44
  • Price to Book = 2.39
  • Price to Tangible Book = 2.39
  • Price to Cash Flow = 62.6
  • Price to Free Cash Flow = -325.5
  • Quick Ratio = N.A.
  • Current Ratio = N.A.
  • LT Debt to Equity = 1.36
  • Total Debt to Equity = 1.36
  • Interest Coverage = 1.4
  • Inventory Turnover = N.A.
  • Asset Turnover = 0.1
  • ROE = 3.99%
  • Return on Assets = 4.42%
  • 200 day moving average = 18.12
  • Current Ratio = 1.11
  • Total debt = 1.22B
  • Book value = 8.69
  • Qtrly Earnings Growth = 26%

  • Dividend yield 5 year average = 7.1%
  • Dividend rate = $ 1.64
  • Payout ratio = 524%
  • Dividend growth rate 3 year avg = 10.01%
  • Dividend growth rate 5 year avg = 15.37%
  • Consecutive dividend increases = 8 years
  • Paying dividends since = 1992
  • Total return last 3 years = 71.36%
  • Total return last 5 years = 51.02%

CenturyLink, Inc. (CTL)

Industry: Services

It has a levered free cash flow or $3.22 billion and a current ratio of 0.80

Net income for the past three years

  • 2008 = $365.74 million
  • 2009 = $647.22 million
  • 2010 = $947.71 million
  • 2011= it stands at $466 million and could top the $616 million mark.

Total cash flow from operating activities

  • 2008 = $853.3 million
  • 2009 = $1.58 billion
  • 2010 = $2.05 billion
  • 2011= it stands at $3.48 billion and could top the $4.6 billion mark.

Key Ratios

  • P/E Ratio = 20.2
  • P/E High - Last 5 Yrs = 15
  • P/E Low - Last 5 Yrs = 4.5
  • Price to Sales = 1.84
  • Price to Book = 1.04
  • Price to Tangible Book = -7.6
  • Price to Cash Flow = 6
  • Price to Free Cash Flow = -72.1
  • Quick Ratio = 0.7
  • Current Ratio = 0.8
  • LT Debt to Equity = 0.96
  • Total Debt to Equity = 1.01
  • Interest Coverage = 2.3
  • Inventory Turnover = 281.3
  • Asset Turnover = 0.3
  • ROE = 4.38%
  • Return on Assets = 3.8%
  • 200 day moving average = 35.56
  • Current Ratio = 0.8
  • Total debt = 22.18B
  • Book value = 35.59
  • Qtrly Earnings Growth = -39.7%

  • Dividend yield 5 year average = 6.3%
  • Dividend rate = $ 2.90
  • Payout ratio = 158%
  • Dividend growth rate 3 year avg = 10.92%
  • Dividend growth rate 5 year avg = 76.44%
  • Consecutive dividend increases = 0 years
  • Paying dividends since = 1974
  • Total return last 3 years = 68.13%
  • Total return last 5 years = 7.18%

Plains All American Pipelines (PAA)

Industry: Equipment & Services

It has a levered free cash flow or $849 million and a current ratio of 1.02.

Net income for the past three years

  • 2008 = $437 million
  • 2009 = $579 million
  • 2010 = $505 million
  • 2011= it stands at $688 million and could top the $968 million mark.

Total cash flow from operating activities

  • 2008 = $857 million
  • 2009 = $365 million
  • 2010 = $259 million
  • 2011= $1.72 billion and could come in as high as $2.4 billion.

Key Ratios

  • P/E Ratio = 18.7
  • P/E High - Last 5 Yrs = 27.2
  • P/E Low - Last 5 Yrs = 8.7
  • Price to Sales = 0.36
  • Price to Book = 2.35
  • Price to Tangible Book = 3.54
  • Price to Cash Flow = 10.7
  • Price to Free Cash Flow = -108.9
  • Quick Ratio = 0.7
  • Current Ratio = 1
  • LT Debt to Equity = 0.91
  • Total Debt to Equity = 1.03
  • Interest Coverage = 4.4
  • Inventory Turnover = 23.4
  • Asset Turnover = 2.4
  • ROE = 17.34%
  • Return on Assets = 5.4%
  • 200 day moving average = 64.91
  • Current Ratio = 1.02
  • Total debt = 5.16B
  • Book value = 32.33
  • Qtrly Earnings Growth = 246.9%

  • Dividend yield 5 year average = 6.7%
  • Dividend rate = $ 3.97
  • Payout ratio = 92%
  • Dividend growth rate 3 year avg = 3.35%
  • Dividend growth rate 5 year avg = 5.86%
  • Consecutive dividend increases = 12 years
  • Paying dividends since = 1999
  • Total return last 3 years = 136.55%
  • Total return last 5 years = 78.8%

Positive developments

Net Income could come in at double the 2010 rate; current projections are for net income to come in the $960 million- $1 billion range.

Plains All American Pipeline, L.P today announced a quarterly cash distribution of $1.025 per unit ($4.10 per unit on an annualized basis) on all of its outstanding limited partner units. The distribution will be payable on February 14, 2012, to holders of record of such units at the close of business on February 3, 2012. This distribution represents an increase of 7.0% over the quarterly distribution of $0.9575 per unit ($3.83 per unit on an annualized basis) paid in February 2011 and an increase of 3.0% over the quarterly distribution of $0.995 per unit ($3.98 per unit on an annualized basis) paid in November 2011.

Suburban Propane Partners L.P. (SPH)

Industry: Gas Utilities

Net income for the past three years

  • 2009 = $165.24 million
  • 2010 = $115.32 million
  • 2011 = $114.97 million

Total cash flow from operating activities

  • 2009 = $246.56 million
  • 2010 = $155.8 million
  • 2011 = $132.79 million

Key Ratios

  • P/E Ratio = 13.4
  • P/E High - Last 5 Yrs = 18.3
  • P/E Low - Last 5 Yrs = 4.1
  • Price to Sales = 1.28
  • Price to Book = 4.26
  • Price to Tangible Book = 18.96
  • Price to Cash Flow = 10.1
  • Price to Free Cash Flow = -114.6
  • Quick Ratio = 1.4
  • Current Ratio = 2
  • LT Debt to Equity = 0.97
  • Total Debt to Equity = 0.97
  • Interest Coverage = 5.2
  • Inventory Turnover = 15.1
  • Asset Turnover = 1.2
  • ROE = 31.9%
  • Return on Assets = 9.61%
  • 200 day moving average = 46.88
  • Current Ratio = 1.97
  • Total debt = 352.77M
  • Book value = 10.11
  • Qtrly Earnings Growth = N/A

  • Dividend yield 5 year average = 7.2%
  • Dividend rate = $ 3.41
  • Payout ratio = 106%
  • Dividend growth rate 3 year avg = 2.26%
  • Dividend growth rate 5 year avg = 6.58%
  • Consecutive dividend increases = 13 years
  • Paying dividends since = 1996
  • Total return last 3 years = 35.95%
  • Total return last 5 years = 54.12%

Warning

Net income and cash flow from operating activities has been declining for the past three years in a row. This is not a good sign and is usually associated with a company that might end up having to cut its dividend. However, as they have a stellar record of consecutively increasing their dividend for 13 years, they will do everything possible before announcing a cut. Companies with stellar dividend histories hate to have any blemishes on their record.

Getty Realty Corp. (GTY)

Industry: REITs

Net income for the past three years

  • 2008 = $41.81 million
  • 2009 = $47.05 million
  • 2010 = $51.7 million

Total cash flow from operating activities

  • 2008 = $47.59 million
  • 2009 = $52.54 million
  • 2010 = $56.93 million

Key Ratios

  • P/E Ratio = 12.1
  • P/E High - Last 5 Yrs = 23.6
  • P/E Low - Last 5 Yrs = 7
  • Price to Sales = 5.4
  • Price to Book = 1.4
  • Price to Tangible Book = 1.4
  • Price to Cash Flow = 12.6
  • Price to Free Cash Flow = 66.2
  • Quick Ratio = N.A.
  • Current Ratio = N.A.
  • LT Debt to Equity = 0.43
  • Total Debt to Equity = 0.43
  • Interest Coverage = 9.4
  • Inventory Turnover = N.A.
  • Asset Turnover = 0.2
  • ROE = 12.28%
  • Return on Assets = 6.4%
  • 200 day moving average = 16.64
  • Current Ratio = 0.92
  • Total debt = 170.71M
  • Book value = 11.98
  • Qtrly Earnings Growth = -59.9%

  • Dividend yield 5 year average = 8%
  • Dividend rate = $ 1.46
  • Payout ratio = 122%
  • Dividend growth rate 3 year avg = -7.14%
  • Dividend growth rate 5 year avg = -0.23%
  • Consecutive dividend increases = 9 years
  • Paying dividends since = 1998
  • Total return last 3 years = 6.17%
  • Total return last 5 years = -17.37%
  • Warning

3 and 5 year dividend growth rates are negative and the quarterly earnings growth rate has taken a rather large hit (-59%).

Conclusion

We would wait for a strong pullback before committing fresh money to this market.

Growth of $10,000 graphs sourced from Morningstar.com. Dividend history charts sourced from dividata.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, 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 Plays With Healthy Dividends As High As 8.7%