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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.

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, 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 5 Interesting Plays With Yields As High As 11.50%.

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.

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

ROE is obtained by dividing the net income by share holder's equity. It measures how much profit a company generates with the money shareholders have invested in it.

Price to tangible book is obtained by dividing share price by tangible book value per share. The ratio gives investors some idea of whether they are paying too much for what would be left over if the company were to declare bankruptcy immediately. In general stocks that trade at higher price to tangible book value could leave investors facing a great percentage per share loss than those that trade at lower ratios. The price to tangible book value is theoretically the lowest possible price the stock would trade to

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. Additional key metrics are addressed in this article The Highest Paying REITs With Yields As High As 13%.

With so many good plays to choose from it was hard to narrow it down to one so what we did was selected two. From a conservative perspective Sunoco Logistics Partners L.P. (NYSE: SXL) would be our first choice for the following reasons:

  1. It has a five dividend average of 6.5%
  2. A five dividend growth rate of 9.74%
  3. A free cash flow rate of $284 million
  4. Has consecutively increased its dividend for 9 years in a row
  5. Has an ROE of 28%
  6. A decent quarterly earnings growth rate of 28%
  7. A good interest coverage ratio of 9.3
  8. A strong 3 year total return of 134%
  9. It recently increased its dividend from 41.3 cents to 42 cents.

From a more aggressive perspective Mesabi Trust (NYSE: MSB) would our first choice for the following reasons:

  1. 5 year dividend average of 11.2%
  2. 5 year dividend growth rate of 8.76%
  3. A strong 3 year total return of 323%
  4. A ROE of 720%
  5. A quarterly earnings growth rate of 20.7%
  6. Net income and total cash flow from operating activities have been trending upwards for the past few years
  7. Finally 10K invested for 10 years in MSB would have grown to a whopping $122K for annualized rate of return in excess of 25%

Investors should pay attention to the following risks associated with trusts:

  1. 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.
  2. 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.

Stock

Dividend Yield (%)

Market Cap

Forward P/E

EBITDA

Quarterly Revenue Growth

Beta

Revenue

Operating Cash flow

BPT

8.60

2.53B

N/A

202.4M

24.80%

0.63

203.56M

N/A

MSB

9.40

413.5M

11.5

32.2M

20.70%

1.73

33.12M

16.73M

SXL

4.40

4.08B

15.35

546.33M

51.90%

0.17

10.90B

N/A

HAS

3.9

4.6B

11.83

745.84M

4.80%

0.96

4.23B

363.26M

SCG

4.30

5.93B

14.26

1.20B

0.40%

0.54

4.52B

841.00M

BP Prudhoe Bay Royalty Trust (NYSE: BPT)

Industry: Production & Extraction

Net income for the past three years

2008 = $250.54 million

2009 = $158.04 million

2010 = $184.42 million

20111= it stands at $159 and could top the $216 million mark.

Key Ratios

P/E Ratio = 12.3

P/E High - Last 5 Yrs = 13.9

P/E Low - Last 5 Yrs = 5

Price to Sales = 12.25

Price to Book = 3597.55

Price to Cash Flow = 12.3

Price to Free Cash Flow = N.A.

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 = 162.7

ROE = 20225.77%

Return on Assets = 10110.82%

200 day moving average = 111.25

Current Ratio = 3.26

Total debt = 0

Book value = 0.03

Qtrly Earnings Growth = 25.9%

Dividend yield 5 year average = 10.2%

Dividend rate = $ 9.50

Payout ratio = 100%

Dividend growth rate 3 year avg = -1.41%

Dividend growth rate 5 year avg = 0.64%

Consecutive dividend increases = 0 years

Paying dividends since = 1990

Total return last 3 years = 96.67%

Total return last 5 years = 119.83%

Notes

Dividend was increased from $1.95 to $2.51. It also sports a decent quarterly earnings growth of 25%

Mesabi Trust

Industry: Non-Precious Metals

Levered Free Cash Flow: 6.96M

Net income

2008=$-3.6 million

2009 = $34.67 million

2010 = $12.43 million

2011 = $32.47 million

Total cash flow from operating activities

2009 = $32.95 million

2010 = $17.02 million

2011 = $30.36 million

Key Ratios

P/E Ratio = 13.2

P/E High - Last 5 Yrs = 23.5

P/E Low - Last 5 Yrs = 2.6

Price to Sales = 12.84

Price to Book = 90.14

Price to Tangible Book = 90.14

Price to Cash Flow = 13.2

Price to Free Cash Flow = -34.7

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 = 1.8

ROE = 719.23%

Return on Assets = 111.37%

200 day moving average = 26.4

Current Ratio = 1.33

Total debt = 0

Book value = 0.36

Qtrly Earnings Growth = 20.7%

Dividend yield 5 year average = 11.2%

Dividend rate = $ 2.53

Payout ratio = 98%

Dividend growth rate 3 year avg = 21.42%

Dividend growth rate 5 year avg = 8.76%

Consecutive dividend increases = 5 years

Paying dividends since = 1990

Total return last 3 years = 323.44%

Total return last 5 years = 75.88%

Notes

MSB will pay out a distribution of 76 cents a share even though analysts were expecting 96 cents; the last payment was for $1.12. "Despite the shortfall, there is no reason to change our distribution and EPS estimates of $2.82/sh for FY'13," the analysts wrote in a Jan. 17 report.

Net income and total cash from operating activities have generally been trending upwards and it also sports a decent quarterly earning's growth rate of 20.7%. One needs to be ready to deal with volatility as the distribution is tied to the price of the underlying commodity; if you cannot deal with volatile moves in terms of the distribution, you will receive, then you are better of skipping this play. It has a superb three year gain of 323%, which would have more than made up for the erratic distribution history. 100K invested for 10 years would have grown to $1.2 million.

Sunoco Logistics Partners L.P.

Industry: Equipment & Services

It has a free cash flow rate of $284.7 million

Net income for the past three years

2008 = $214.48 million

2009 = $250 million

2010 = $346 million

2011= It stands at $237 million and it could top $337 million

Total cash flow from operating activities

2008 = $228.59 million

2009 = $176 million

2010 = $341 million

2011= It stands at $215 million and could come in as high as $400 million

Key Ratios

P/E Ratio = 15.8

P/E High - Last 5 Yrs = 19

P/E Low - Last 5 Yrs = 5.4

Price to Sales = 0.39

Price to Book = 3.52

Price to Tangible Book = 5.29

Price to Cash Flow = 9.2

Price to Free Cash Flow = -11.4

Quick Ratio = 0.9

Current Ratio = 1.1

LT Debt to Equity = 1.66

Total Debt to Equity = 1.66

Interest Coverage = 9.3

Inventory Turnover = 29

Asset Turnover = 2

ROE = 28.96%

Return on Assets = N/A

200 day moving average = 32.42

Current Ratio = N/A

Total debt = 1.80B

Book value = 10.16

Qtrly Earnings Growth = 28.5%

Dividend yield 5 year average = 6.5%

Dividend rate = $ 1.64

Payout ratio = 66%

Dividend growth rate 3 year avg = -14.12%

Dividend growth rate 5 year avg = 9.74%

Consecutive dividend increases = 9 years

Paying dividends since = 2002

Total return last 3 years = 134.1%

Total return last 5 years = 142.44%

Notes

Net income and total cash flow from operating activities have generally been trending upwards for the past several years. It sports a decent quarterly earnings growth rate of 28%, a decent 5 year dividend growth rate of 9.74%, has consecutively increased dividends for nine years, has a very nice 5 year dividend average of 6.7% and has a very decent interest coverage ratio of 9.3. The dividend has been increased from 41.3 cents to 42.00 cents.

Hasbro, Inc. (NYSE: HAS)

Industry: Leisure Equipment

Levered Free Cash Flow: 306.71M

Net income for the past three years

2009 = $374.93 million

2009 = $374.93 million

2010 = $397.76 million

2011= it stands at $246 and could come in as high as $416 million.

Total cash flow from operating activities

2009 = $265.63 million

2009 = $265.63 million

2010 = $367.99 million

2011= It stands at $1 million and could come in as low as $-120 million.

Key Ratios

P/E Ratio = 12.9

P/E High - Last 5 Yrs = 21.5

P/E Low - Last 5 Yrs = 8.5

Price to Sales = 1.09

Price to Book = 3.35

Price to Tangible Book = 10.85

Price to Cash Flow = 8.1

Price to Free Cash Flow = 49.3

Quick Ratio = 1.5

Current Ratio = 2.3

LT Debt to Equity = 1.02

Total Debt to Equity = 1.03

Interest Coverage = 6.3

Inventory Turnover = 4

Asset Turnover = 1

ROE = 26.93%

Return on Assets = 8.94%

200 day moving average = 35.6

Current Ratio = 2.34

Total debt = 1.42B

Book value = 10.67

Qtrly Earnings Growth = 10.2%

Dividend yield 5 year average = 2.8%

Dividend rate = $ 1.44

Payout ratio = 39%

Dividend growth rate 3 year avg = 15%

Dividend growth rate 5 year avg = 18.41%

Consecutive dividend increases = 8 years

Paying dividends since = 1981

Total return last 3 years = 74%

Total return last 5 years = 41.13%

Notes

While net income has been increasing for the past several years (it's on course to increase for four years in a row), total cash flow from operating activities has taken a big hit and could come in negative for 2011; cash flow is what the business uses to pay its bills and dividends. On the bright side, dividends have been raised for eight years in a row, and it does sport a strong five-year dividend growth rate of 15%. It only has a low payout ratio of 39% so while the negative operating cash flow is of concern the other factors more than make up for it.

We would keep an eye of cash flow going forward; if it continues to drop, then we would monitor other ratios such as payout ratios and net income. A company that has been increasing dividends for over eight years is not going to cut them, unless they are forced to. In a positive development Hasboro INC announced they were going to raise the dividend by 20% from 30 cents to 36 cents; shareholders of record as of May 1 will be paid the dividend on May 15.

SCANA Corp (NYSE: SCG)

Industry : Electric Utilities

Levered Free Cash Flow: -238.68M

Net income for the past three years

2008 = $346 million

2009 = $357 million

2010 = $376 million

2011= It stands at $289 and could top the $394 million mark.

Total cash flow from operating activities

2008 = $454 million

2009 = $679 million

2010 = $811 million

2011= It stands at $677 and could come in as high as $927 million.

Key Ratios

P/E Ratio = 15.2

P/E High - Last 5 Yrs = 16.6

P/E Low - Last 5 Yrs = 9.1

Price to Sales = 1.3

Price to Book = 1.53

Price to Tangible Book = 1.63

Price to Cash Flow = 7.6

Price to Free Cash Flow = -16.5

Quick Ratio = 0.4

Current Ratio = 0.8

LT Debt to Equity = 1.14

Total Debt to Equity = 1.37

Interest Coverage = 2.9

Inventory Turnover = 7.5

Asset Turnover = 0.4

ROE = 10.35%

Return on Assets = 3.93%

200 day moving average = 41.56

Current Ratio = 0.84

Total debt = 5.41B

Book value = 29.68

Qtrly Earnings Growth = 4%

Dividend yield 5 year average = 4.8%

Dividend rate = $ 1.94

Payout ratio = 65%

Dividend growth rate 3 year avg = 1.78%

Dividend growth rate 5 year avg = 3.23%

Consecutive dividend increases = 11 years

Paying dividends since = 1946

Total return last 3 years = 47.94%

Total return last 5 years = 31.82%

Conclusion

The markets have had a very strong run over the past few months. Long term players know from experience that the best time to buy is when there is fear in the air; the masses panic and dump everything. When there is blood on the streets one finds the best long term bargains. As the markets are extremely overbought in the short and intermediate time frames, long-term investors should be patient and wait for a strong pull back before committing large sums of money to this market.

The targets we issued in early December for the SPX were hit and surpassed. We issued two targets; the first fell in the 1300-1320 ranges and the second called for the SPX to spike to the 1340 ranges. The charts are clearly indicating that the markets are ready for a sharp correction which in our opinion will be followed by a strong counter rally that could last several months.

All charts sourced from dividata.com

Source: 5 Great Plays With Yields As High As 9.4%