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Today we are going to examine six stocks that offer high yields. Investors should not base their decision on yield alone. Doing so could prove to be a terrible mistake. Getting a handle on some of the following key ratios could help investors make a more informed decision, and in the process prevent one from deploying one's hard-earned money into a dud.

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, 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. 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: The Highest Paying REITs With Yields As High As 13%

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

Price to sales ratio is calculated by dividing the company's share price by its revenue per share. Generally, the smaller the ratio (less than 1.0) the better the investment since the investor is paying less for each unit of sales. However, there are exceptions as a company with a low price to sales ratio could be unprofitable. It is sometimes used to determine the relative valuation of a sector.

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.

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 Dividend Ideas With Yields As High As 13.4%

There are several great plays on this list, such as T, EXC, ETE, etc. We decided on ETE because it sports good metrics but also the rate of return to date is far superior to T or EXE. However, SUG actually sports a better rate of return than ETE but as we did not examine it as thoroughly as the other plays (it was provided as bonus play) we decided to stick with ETE. We like Energy Transfer Equity L P (NYSE:ETE) for the following reasons:

  • It has five year dividend growth rate of 22.5%
  • It has consecutively increased dividends for 5 years going on 6.
  • It sports a total 3 year return of 166%
  • It has a quarterly revenue growth rate of 32%
  • It has five year dividend average of 6.7%
  • Net income and cash flow from operating activities is on the rise again.

100K invested in ETE for 6 years would have grown to 231K

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 MLPS/REITS as they are generally pay a majority of their cash flow as distributions; in the case of REITS by law they have to pay out 90% of their cash flow as dividends. 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.
  • 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 $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

ETE

5.90%

9.3B

20.10

1.80B

32.10%

0.73

7.84B

1.26B

T

6.00%

177B

11.77

30.50B

3.60%

0.60

126.72B

34.65B

PBI

8.00%

3.8B

9.03

1.09B

-3.40%

1.01

5.37B

1.04B

HPT

7.20

3.09B

7.6

576.56M

13.30%

1.39

1.18B

350.85M

EXC

5.2%

26.6B

14.21

6.66B

0.10%

0.55

19.43B

4.05B

Energy Transfer Equity L P

Industry: Equipment & Services

It has a levered free cash flow rate of $-524 million and a current ratio of 0.80

Net income for the past three years

  • 2008 = $375.05 million
  • 2009 = $442.48 million
  • 2010 = $192.76 million
  • 2011= it stands at $224 million and could potentially top the $295 million mark.

Total cash flow from operating activities

  • 2008 = $823.76 million
  • 2009 = $723.47 million
  • 2010 = $1.09 billion
  • 2011= it stands at $1.1 billion and could top the $1.5 billion mark.

Key Ratios

  • P/E Ratio = 31.5
  • P/E High - Last 5 Yrs = 47
  • P/E Low - Last 5 Yrs = 7.6
  • Price to Sales = 1.19
  • Price to Book = 183
  • Price to Tangible Book = -3.05
  • Price to Cash Flow = 9.3
  • Price to Free Cash Flow = -2.50
  • Quick Ratio = 0.5
  • Current Ratio = 0.8
  • LT Debt to Equity = 222.72
  • Total Debt to Equity = 231.11
  • Interest Coverage = 1.6
  • Inventory Turnover = 20.7
  • Asset Turnover = 0.4
  • ROE = 7.98%
  • Return on Assets = 4.1%
  • Current Ratio = 0.79
  • Total debt = 11.99B
  • Book value = 0.23
  • Qtrly Earnings Growth = N/A

  • Dividend yield 5 year average = 6.7%
  • Dividend rate = $ 2.44
  • Payout ratio = 168%
  • Dividend growth rate 3 year avg = 6.45%
  • Dividend growth rate 5 year avg = 22.45%
  • Consecutive dividend increases = 5 years
  • Paying dividends since = 2006
  • Total return last 3 years = 166.18%
  • Total return last 5 years = 65.42%

AT&T Inc

Industry: Services

It has strong levered free cash flow rate of $2.73 billion and a current ratio of 0.7.

Net income for the past three years

  • 2008 = $12.87 billion
  • 2009 = $12.14 billion
  • 2010 = $19.87 billion
  • 2011= It stands at $10.7 billion and could top the $15 billon mark.

Total cash flow from operating activities

  • 2008 = $33.66 billion
  • 2009 = $34.41 billion
  • 2010 = $35 billion
  • 2011= It stands at $27 billion and could top the $37 billion mark.

Key Ratios

  • P/E Ratio = 44.8
  • P/E High - Last 5 Yrs = 48.4
  • P/E Low - Last 5 Yrs = 7.1
  • Price to Sales = 1.40
  • Price to Book = 1.57
  • Price to Tangible Book = -9.39
  • Price to Cash Flow = 5.8
  • Price to Free Cash Flow = 41.50
  • Quick Ratio = 0.7
  • Current Ratio = 0.8
  • LT Debt to Equity = 0.55
  • Total Debt to Equity = 0.63
  • Interest Coverage = 6.4
  • Inventory Turnover = N.A.
  • Asset Turnover = 0.5
  • ROE = 3.84%
  • Return on Assets = 2.81%
  • Current Ratio = 0.75
  • Total debt = 64.75B
  • Book value = 17.81
  • Qtrly Earnings Growth = N/A

  • Dividend yield 5 year average = 5.8%
  • Dividend rate = $ 1.76
  • Payout ratio = 261%
  • Dividend growth rate 3 year avg = 2.43%
  • Dividend growth rate 5 year avg = 5.3%
  • Consecutive dividend increases = 28 years
  • Paying dividends since = 1881
  • Total return last 3 years = 40.82%
  • Total return last 5 years = -0.01%

Notes

Strong levered free cash flow rate and net income has been rising until 2010, and it could take a small hit in 2011. Operating cash flow has been rising since 2008, and has been more than enough to meet all its dividend obligations. It also sports a decent interest coverage ratio of 6.4.

Pitney Bowes Inc

Industry: Office Equipment & Furniture

Net income for the past three years

  • 2008 = $419.8 million
  • 2009 = $444.92 million
  • 2010 = $310.71 million
  • 2011= It stands at $359 million and could top the $459-500 million ranges.

Total cash flow from operating activities

  • 2008 = $990.44 million
  • 2009 = $824.07 million
  • 2010 = $952.12 million
  • 2011= It stands at $759 million and could top the $1 billion mark.

Key Ratios

  • P/E Ratio = 9.2
  • P/E High - Last 5 Yrs = 102.1
  • P/E Low - Last 5 Yrs = 8.6
  • Price to Sales = 0.72
  • 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%
  • 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 = $ 1.50
  • Payout ratio = 71%
  • Dividend growth rate 3 year avg = 1.87%
  • Dividend growth rate 5 year avg = 3.03%
  • Consecutive dividend increases = 30 years
  • Paying dividends since = 1934
  • Total return last 3 years = 7.43%
  • Total return last 5 years = -44.61%

Warning

Quarterly earnings growth has taken a massive beating; current reading is -94.3% and total return for the past 5 years is a dismal -44.6%. One would have actually lost money investing in this stock for the past 10 years; 100k invested in PBI would have shrunk to 84.5K.

Hospitality Properties Trust

Industry: REITs

Net income for the past three years

  • 2008 = $134 million
  • 2009 = $193.35 million
  • 2010 = $21.36 million
  • 2011= it stands at $152 million and could come in as high as $190 million.

Total cash flow from operating activities

  • 2008 = $375.44 million
  • 2009 = $320.12 million
  • 2010 = $341.45 million
  • 2011= It stands at $248 million and could come in as high as $330 million.

Key Ratios

  • P/E Ratio = 103.1
  • P/E High - Last 5 Yrs = N.A.
  • P/E Low - Last 5 Yrs = N.A.
  • Price to Sales = 3.04
  • Price to Book = 1.27
  • Price to Tangible Book = 1.27
  • Price to Cash Flow = 105.30
  • Price to Free Cash Flow = 51.50
  • Quick Ratio = N.A.
  • Current Ratio = N.A.
  • LT Debt to Equity = 0.86
  • Total Debt to Equity = 0.86
  • Interest Coverage = 1.4
  • Inventory Turnover = N.A.
  • Asset Turnover = 0.2
  • ROE = 2.03%
  • Return on Assets = 4.15%
  • Current Ratio = 0.92
  • Total debt = 2.08B
  • Book value = 19.69
  • Qtrly Earnings Growth = -5.4%

  • Dividend yield 5 year average = 9.6%
  • Dividend rate = $ 1.80
  • Payout ratio = 750%
  • Dividend growth rate 3 year avg = 71.54%
  • Dividend growth rate 5 year avg = -14.52%
  • Consecutive dividend increases = 3 years
  • Paying dividends since = 1995
  • Total return last 3 years = 114.61%
  • Total return last 5 years = -25.61%

Notes

Net income is set to soar for 2011 after pulling back strongly in 2010. Operating cash flow has also been trending upwards for the past several years. After taking a big hit in 2009 (it dropped from $3.08 to 77 cents) the dividend stabilised from 2010; since 2010, the yearly dividend has remained fixed at 1.80. It could make for a decent long term play, though it would be best suited for investors who are willing to take on some extra risk. We would like to see quarterly earnings growth turn positive; current it's at -5.4%, thought it sports a positive quarterly revenue growth rate of 13.4%.

Exelon Corp.

Industry: Electric Utilities

Net income for the past three years

  • 2008 = $2.74 billion
  • 2009 = $2.71 billion
  • 2010 = $2.57 billion
  • 2011= it stands at $1.9 billion and could top the $2.5 billion mark.

Total cash flow from operating activities

  • 2008 = $6.56 billion
  • 2009 = $6.1 billion
  • 2010 = $5.25 billion
  • 2011= It stands at $2.9 billion and could top the $5 billion mark.

Key Ratios

  • P/E Ratio = 10.6
  • P/E High - Last 5 Yrs = 22.3
  • P/E Low - Last 5 Yrs = 9.4
  • Price to Sales = 1.39
  • Price to Book = 1.86
  • Price to Tangible Book = 2.27
  • Price to Cash Flow = 5.60
  • Price to Free Cash Flow = -10.50
  • Quick Ratio = 0.7
  • Current Ratio = 1.3
  • LT Debt to Equity = 0.88
  • Total Debt to Equity = 0.99
  • Interest Coverage = 6.2
  • Inventory Turnover = 14.3
  • Asset Turnover = 0.4
  • ROE = 17.05%
  • Return on Assets = 5.32%
  • 200 day moving average = 42.59
  • Current Ratio = 1.26
  • Total debt = 14.58B
  • Book value = 21.65
  • Qtrly Earnings Growth = -28.9%

  • Dividend yield 5 year average = 4.2%
  • Dividend rate = $ 2.10
  • Payout ratio = 56%
  • Dividend growth rate 3 year avg = 1.23%
  • Dividend growth rate 5 year avg = 5.87%
  • Paying dividends since = 1902
  • Total return last 3 years = -15.09%
  • Total return last 5 years = -18.36%

Notes

Dividends have been increasing nicely since 2000, though the quarterly earnings' growth rate has turned negative (-28.9%). It also sports a decent interest coverage ratio of 6.2 and very reasonable payout ratio of 56%. We would rate this stock as a long term buy but would wait for a strong pullback before adding to current or opening up new positions.

Conclusion

The markets are now churning; the volume is slowly increasing on down days and decreasing on up days suggesting that a top is taking hold. We expect the markets to mount a strong and sharp correction, followed by a strong counter rally that could last for several months. Long term investors should patiently wait for a strong pullback before committing large sums of fresh money to this market. Buy when there is blood in the streets, and sell when the masses are in a euphoric mood.

Another stock that makes for an interesting play is Southern Union Company Common S (NYSE:SUG) has a dividend of 1.4%, a revenue growth of 26.6%, a quarterly earnings growth of 55%, a ROE of 9.87%, a five-year dividend growth rate of 9.17%, a five dividend average of 2.4%, has total 3 year return of 220% and has been paying dividends since 2006. It has a levered free cash flow rate of $111.7 million. 100k invested for 6 years would have grown to 292K.

Net income for the past three years

  • 2008= -$295.1 million
  • 2009 = $179.5 million
  • 2010= $224.5 million
  • 2011= it stands at $178 million and could top the $240 million mark.

Total cash flow from operating activates for the last 3 years

  • 2008= -$486.8 million
  • 2009 = $579.2 million
  • 2010= $424.6 million
  • 2011= It stands at $450 and could top the $600 million mark.

Key ratios

  • P/E Ratio = 21.60
  • P/E High - Last 5 Yrs = 74.40
  • Price to Sales = 2.02
  • Price to Book = 2.06
  • Price to Tangible Book = 2.13
  • Price to Cash Flow = 11.50
  • Price to Free Cash Flow = 41.20
  • Quick Ratio = 0.2
  • Current Ratio = 0.4
  • LT Debt to Equity = 1.03
  • Total Debt to Equity = 1.34
  • Interest Coverage = 2.60
  • Inventory Turnover = 10.00
  • Asset Turnover = 0.3

All 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: 6 Great Stocks With Yields As High As 8%