5 Dividend Ideas With Yields As High As 13.4%

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Includes: ARI, BPL, EMR, MFA, TI
by: Tactical Investor

Investors would do well to get a handle on some of the following key ratios for they could prove to be rather useful in the selection process.

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

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: Dividend Champs With Yields As High As 13.6%

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.

Quick ratio or acid -test is obtained by adding cash and cash equivalents plus marketable securities and accounts receivable dividing them by current liabilities. It is a measure of a company's ability to use its quick assets (assets that can be sold of 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 key metrics are addressed in this article: 5 Plays With Healthy Dividends As High As 8.7%

Our favourite play on the list is Emerson Electric Co. (NYSE:EMR) but Buckeye Partners LP came in at a very close second place; we like EMR for the following reasons.

  1. A very strong levered free cash flow of $2.53 billion
  2. A five year dividend growth rate of 9.19%
  3. A five year dividend average of 3.00
  4. A quarterly revenue growth rate of 12.7%
  5. It sports a high beta so it's a good candidate for covered writes
  6. It has consecutively increased its dividend for 55 years in a row; it is a true dividend king
  7. It has a total 3 year return of 67%
  8. It has a very good interest coverage ratio of 15.80

100K invested in EMR for 10 years would have grown to 199,530.89

Investors should be aware of the following facts in regard to investing in MLPs and REITS.

  1. Payout ratios are not that important when it comes to MLPS/REITS 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 and REITS 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/dividend declared per unit/share.
  2. 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.
  3. 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 $1000 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

TI

6.00%

19.9B

15

16.35B

12.60%

0.97

39.8B

11.54B

EMR

3.00%

39.2B

13.41

5.1B

12.10%

1.43

24.2B

3.23B

BPL

6.4%

5.98B

18.3

427.5M

52%

0.36

4.46B

178.4M

ARI

10.40

314.99M

9.23

33.56M

86.10%

0.49

34.83M

29.84M

MFA

13.40

2.65B

7.67

472.16M

10.50%

0.41

338.28M

304.22M

Click to enlarge

Telecom Italia SPA (NYSE:TI)

It has a levered free cash flow rate of $5.95 billion.

  • Net income for the past three years
  • 2008 = $3.12 billion
  • 2009 = $2.29 billion
  • 2010 = $ 4.79 billion
  • Total cash flow from operating activities
  • 2008 = $11.8 billion
  • 2009 = $7.8 billion
  • 2010 = $9.22 billion

Key Ratios

  • P/E Ratio = 3.80
  • P/E High - Last 5 Yrs = 20.80
  • P/E Low - Last 5 Yrs = 3.60
  • Price to Sales = 0.66
  • Price to Book = 0.56
  • Price to Tangible Book = -0.69
  • Price to Cash Flow = 1.70
  • Price to Free Cash Flow = 4.30
  • ROE 2.79%
  • Return on assets 5.03%
  • Total debt $ 50.97B
  • Quarterly earnings growth rate 32.7%
  • 200 day moving average $ 10.40
  • Book value $17.93

  • Dividend yield 5 year Average 5.6%
  • Dividend rate $0.53
  • Dividend growth rate 3 year average 27.98%
  • Consecutive dividend increases 4 years
  • Paying dividends since 2004
  • Total return last 3 years - 12%
  • Total return last 5 year -52%

Notes

It is trading $7.60 below book value.

Emerson Electric Co.

It has a levered free cash flow rate of $2.53 billion, a current ratio of 1.45 and a beta of 1.43 which makes it a good candidate for covered writes. Selling covered calls can open up a second stream of income.

Net income for the past three years

  • 2008 = $1.72 billion
  • 2009 = $2.16 billion
  • 2010 = $2.48 billion

2011= it stands at $1.9 billion and could top the $2.7 billion mark.

Total cash flow from operating activities

  • 2008 = $3.08 billion
  • 2009 = $3.29 billion
  • 2010 = $3.23 billion
  • 2011= It stands at $2.9 billion and could top the $4.1 billion

Key Ratios

  • P/E Ratio = 16.00
  • P/E High - Last 5 Yrs = 20.20
  • P/E Low - Last 5 Yrs = 10.70
  • Price to Sales = 1.51
  • Price to Book = 3.71
  • Price to Tangible Book = - 113
  • Price to Cash Flow = 11.40
  • Price to Free Cash Flow = 27.20

  • ROE 24.43%
  • Return on assets 11.32%
  • Total debt $5.2B
  • 200 day moving average $ 47.81
  • Quarterly earnings growth rate 1.60%
  • Book value $14.07
  • Dividend yield 5 year Average 2.70%

  • Dividend rate $1.60
  • Payout ratio 47%
  • Dividend growth rate 5 year average 9.19%
  • Paying dividends since 1947
  • Total return last 3 years 67%
  • Total return last 5 year 30%
  • Consecutively increased dividend for 55 years

Notes

Dividend was increased from 34 cents to 40 cents.

Buckeye Partners LP (NYSE:BPL)

Net income for the past three years

  • 2008 = $ 184 million
  • 2009 = $ 49 million
  • 2010 = $43 million
  • 2011= It stands at $-47 million

Total cash flow from operating activities

  • 2008 = $215 million
  • 2009 = $ 47 million
  • 2010 = $292 million
  • 2011= It stands at $182 million

Key Ratios

  • P/E Ratio = 8
  • P/E High - Last 5 Yrs = N.A.
  • P/E Low - Last 5 Yrs = N.A.
  • Price to Sales = 5.33
  • Price to Book = 1
  • Price to Tangible Book = 1.01
  • Price to Cash Flow = 8.9
  • Price to Free Cash Flow = -4.2

  • ROE 5.06%
  • Return on assets 4.74%
  • Total debt $2.75b
  • 200 day moving average $ 63.38
  • Book value $25.20
  • Dividend yield 5 year Average 6.7%
  • Dividend rate $4.03
  • Payout ratio 209%
  • Dividend growth rate 5 year average 5.53%
  • Consecutive dividend increases 16 years
  • Paying dividends since 1990
  • Total return last 3 years 80%
  • Total return last 5 years 58%

Notes

Dividend was increased from $1.015 to $1.0250. Net income and operating cash flow is dropping. This is usuallynot a good sign but,As the company has increased dividends for 16 years in a row it will do everything in its power to maintain this stellar record before cutting the dividend.

Furthermore, total cash flow generated from operating activities was not enough to cover the dividend payments for 2009 and 2010. It was enough however to cover the dividend for the 1st two quarters of 2011 but not enough to cover the third quarter dividend payments. On the positive side quarterly revenue growth is a strong 52%.

Apollo Commercial Real Estate (NYSE:ARI)

Industry : REITs

Net income

  • 2009 = $-2.18 million
  • 2010 = $11 million
  • 2011= It stands at $17 million and could top the $22 million mark.

Total cash flow from operating activities

  • 2009 = $-1.3 million
  • 2010 = $16.6 million
  • 2011= It stands at $24.5million and could top the $33 million mark.

Key Ratios

  • P/E Ratio = 13.1
  • P/E High - Last 5 Yrs = N.A.
  • P/E Low - Last 5 Yrs = N.A.
  • Price to Sales = 7.22
  • Price to Book = 0.94
  • Price to Tangible Book = 0.94
  • Price to Cash Flow = 14.9
  • Price to Free Cash Flow = 193.2
  • Quick Ratio = N.A.
  • Current Ratio = N.A.
  • LT Debt to Equity = 0.79
  • Total Debt to Equity = 0.79
  • Interest Coverage = 2.5
  • Inventory Turnover = N.A.
  • Asset Turnover = 0.1

  • ROE = N/A
  • Return on Assets = N/A
  • 200 day moving average = 14.13
  • Current Ratio = 0.95
  • Total debt = 561.81M
  • Book value = 16.34
  • Qtrly Earnings Growth = 134%

  • Dividend yield 5 year average = 0%
  • Dividend rate = $ 1.60
  • Payout ratio = 137%
  • Dividend growth rate 3 year avg = N/A
  • Consecutive dividend increases = 1 years
  • Paying dividends since = 2010
  • Total return last 3 years = N/A
  • Total return last 5 years = N/A

Notes

Net income and total cash flow from operating activities are increasing. The total cash flow from operating activities was enough to cover the dividend payments for 2010 and for 2nd and 3rd quarter of 2011 but not the first quarter of 2011. On the positive side it has a very strong quarterly earnings growth rate of 134%

MFA Financial, Inc. (NYSE:MFA)

Industry : REITs

Net income for the past three years

  • 2008 = $45.8 million
  • 2009 = $268.19 million
  • 2010 = $269.77 million
  • 2011= It stands at $245 million and could top the $329 million level.

Total cash flow from operating activities

  • 2008 = $186.43 million
  • 2009 = $269.97 million
  • 2010 = $245.94 million
  • 2011= It stands at $245 million and could top the $331 million mark.

Key Ratios

  • P/E Ratio = 8
  • P/E High - Last 5 Yrs = N.A.
  • P/E Low - Last 5 Yrs = N.A.
  • Price to Sales = 5.33
  • Price to Book = 1
  • Price to Tangible Book = 1.01
  • Price to Cash Flow = 8.9
  • Price to Free Cash Flow = -4.2
  • Quick Ratio = N.A.
  • Current Ratio = N.A.
  • LT Debt to Equity = 0.36
  • Total Debt to Equity = 0.36
  • Interest Coverage = 3.1
  • Inventory Turnover = N.A.
  • Asset Turnover = 0

  • ROE = 12.47%
  • Return on Assets = 3%
  • 200 day moving average = 7
  • Current Ratio = 0.07
  • Total debt = 9.11B
  • Book value = 7.43
  • Qtrly Earnings Growth = 8.4%

  • Dividend yield 5 year average = 11.2%
  • Dividend rate = $ 0.99
  • Payout ratio = 102%
  • Dividend growth rate 3 year avg = 8.35%
  • Dividend growth rate 5 year avg = 38.46%
  • Consecutive dividend increases = 6 years
  • Paying dividends since = 1998
  • Total return last 3 years = 79.25%
  • Total return last 5 years = 55.03%

Notes

Net income has increased for the past three years and is on course to do so for the 4th year in a row. Total cash flow from operating activities is also trending upwards and aside from the small dip in 2010 is on course to beat 2010s figure. It also sports a very strong five year dividend growth rate of 38.46%. This is among the top REIT Plays out there.

All earnings vs. estimate charts sourced from smartmoney.com and all 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. 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.