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Investors should not base their investment decision on yield alone but examine some of the key metrics described below. In most cases, higher yields are associated with a higher degree of risk. It is okay to deploy some capital into riskier plays but betting the house is asking for trouble.

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 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 "5 Excellent Stocks Sporting Yields As High As 10.5%."

Turnover Ratio lets you know the number of times a company's inventory is replaced in a given time period. It is calculated by dividing the cost of goods sold by average inventory during the time period studied. A high turn over ratio indicates that a company is producing and selling its good and services very quickly.

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.

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. For example if a company has an interest ratio of 11.8, this means that it covers interest expenses 11.8 times with operating profits.

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 "5 Interesting Communication Plays"

AstraZeneca Plc (NYSE: AZN) is our play of choice for the following reasons:

Net income and cash flow have been increasing for the past 3 years

It has a very strong levered free cash flow of $6.2 billion

A five-year dividend average of 5.4%

A very manageable payout ratio of 37%

A 5-year dividend growth rate of 12.71%

It has consecutively increased dividends for 9 years

Sports a total 3-year return of 42%

It has a good ROE of 42%

Good quick and current ratio s of 1.4 and 1.5 respectively

A great interest coverage ratio of 13.5

LT Debt to Equity is 0.31

$100 K invested for 6 years would have grown to $163K

Important facts investors should be aware in regards to investing and REITS

  1. 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.

Stock

Dividend Yield (%)

Market Cap

Forward PE

EBITDA

Quarterly Revenue Growth

Beta

Revenue

Operating Cash flow

NZT

11.90

3.41B

15.56

1.38B

-5.10%

1.00

4.16B

1.13B

DCT

5.00

1.41B

13.62

159.43M

10.90%

1.47

250.89M

N/A

AEP

4.70

12.10B

12.2

4.51B

0.30%

0.49

15.12B

3.79B

WRE

5.80

2.00B

15.53

189.39M

10.60%

1.09

317.67M

114.84M

AZN

8.60

58.26B

7.17

15.02B

0.50%

0.60

33.59B

7.82B

Telecom Corp. of New Zealand L

Industry : Services

Levered Free Cash Flow: 36.01M

Net income for the past three years

2009 = $258.88 million

2010 = $261 million

2011 = $135 million

Total cash flow from operating activities

2009 = $1.01 billion

2010 = $1.22 billion

2011 = $1.12 billion

Key Ratios

P/E Ratio = 23.9

P/E High - Last 5 Yrs = 27.6

P/E Low - Last 5 Yrs = 2.1

Price to Sales = 0.81

Price to Book = 1.8

Price to Tangible Book = 3.42

Price to Cash Flow = 3.5

Price to Free Cash Flow = 38.8

Quick Ratio = 0.6

Current Ratio = 0.7

LT Debt to Equity = 0.74

Total Debt to Equity = 0.91

Interest Coverage = 2.4

Inventory Turnover = 32.6

Asset Turnover = 0.8

ROE = 6.84%

Return on Assets = 5.88%

200 day moving average = 9.45

Total debt = 2.29B

Book value = 5

Qtrly Earnings Growth = -100%

Dividend yield 5-year average = 12.8%

Dividend rate = $ 0.71

Payout ratio = 157%

Dividend growth rate 3 year avg = -6.6%

Dividend growth rate 5 year avg = -24.04%

Consecutive dividend increases = 0 years

Paying dividends since = 1991

Total return last 3 years = 62.68%

Total return last 5 years = -20.77%

DCT Industrial Trust Inc

Industry : REITs

Free Cash Flow : $-110 million.

Net income for the past three years

2008 = $9.49 million

2009 = $-18.59 million

2010 = $-37.83 million

2011= It stands at $-29 million and losses could top the $-40 million mark.

Total cash flow from operating activities

2008 = $128.35 million

2009 = $109.75 million

2010 = $91.01 million

2011= It stands at $79 million and could top the $109 mark.

Key Ratios

P/E Ratio = N.A.

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

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

Price to Sales = 5.54

Price to Book = 1.13

Price to Tangible Book = 1.13

Price to Cash Flow = -33.6

Price to Free Cash Flow = -8.2

Quick Ratio = N.A.

Current Ratio = 0.46

LT Debt to Equity = 1.01

Total Debt to Equity = 1.05

Interest Coverage = 0.3

Inventory Turnover = N.A.

Asset Turnover = 0.1

ROE = -2.6%

Return on Assets = 0.69%

200 day moving average = 18.79M

Total debt = 1.25B

Book value = 4.91

Qtrly Earnings Growth = N/A

Dividend yield 5-year average = 8.1%

Dividend rate = $ 0.28

Dividend growth rate 3 year avg = -17.7%

Consecutive dividend increases = 0 years

Paying dividends since = 2006

Total return last 3 years = 94.96%

Total return last 5 years = -34.71%

Notes

Net income has turned negative for two years, going on 3 years; it has a negative 3 dividend growth rate and a weak interest coverage ratio. On the bright side it has a 5-year dividend average of 8.1% and operating cash flow has been enough to more than cover the dividend payments for the last two years. In our opinion there are better plays out there.

American Electric Power Company

Industry : Electric Utilities

Levered Free Cash Flow: 451.62M

Net income for the past three years

2008 = $1.38 billion

2009 = $1.36 billion

2010 = $1.22 billion

2011= It stands at $1.7 billion and could top the $2.5 billion mark

Total cash flow from operating activities

2008 = $2.58 billion

2009 = $2.48 billion

2010 = $2.67 billion

2011= It stands at $3.3 billion and could top $4.9 billion

Key Ratios

P/E Ratio = 10.6

P/E High - Last 5 Yrs = 17.5

P/E Low - Last 5 Yrs = 7.5

Price to Sales = 1.27

Price to Book = 1.31

Price to Tangible Book = 1.31

Price to Cash Flow = 5.5

Price to Free Cash Flow = 6.2

Quick Ratio = 0.4

Current Ratio = 0.8

LT Debt to Equity = 1.04

Total Debt to Equity = 1.21

Interest Coverage = 3

Inventory Turnover = 7.4

Asset Turnover = 0.3

ROE = 10.63%

Return on Assets = 3.47%

200 day moving average = 38.81

Total debt = 18.17B

Book value = 48.38

Qtrly Earnings Growth = 10.2%

Dividend yield 5-year average = 4.7%

Dividend rate = $ 1.88

Payout ratio = 49%

Dividend growth rate 3 year avg = 4.33%

Dividend growth rate 5 year avg = 3.5%

Consecutive dividend increases = 2 years

Paying dividends since = 1909

Total return last 3 years = 41.02%

Total return last 5 years = 5.23%

Notes

Net income and cash flow increasing for the past 3 years; it also sports a good payout ratio of 49%, a 5-year dividend growth rate of 3.5% and has been paying dividends since 1909.

Washington Real Estate Investment

Industry : REITs

Levered Free Cash Flow: 125.69M

Net income for the past three years

2008 = $32.85 million

2009 = $40.75 million

2010 = $37.43 million

2011= It stands at $74 million and could top the $130 million mark.

Total cash flow from operating activities

2008 = $97.02 million

2009 = $102.91 million

2010 = $111.94 million

2011= It stands at $86 million and could top the $113 million mark.

Key Ratios

P/E Ratio = 23.3

P/E High - Last 5 Yrs = 58.3

P/E Low - Last 5 Yrs = 20.6

Price to Sales = 6.88

Price to Book = 2.33

Price to Tangible Book = 2.33

Price to Cash Flow = 23.4

Price to Free Cash Flow = -22.1

Quick Ratio = N.A.

Current Ratio = 0.9

LT Debt to Equity = 1.5

Total Debt to Equity = 1.5

Interest Coverage = 1.2

Inventory Turnover = N.A.

Asset Turnover = 0.1

ROE = 1.71%

Return on Assets = 2.54%

200 day moving average = 28.65

Total debt = 1.28B

Book value = 12.94

Qtrly Earnings Growth = 851.1%

Dividend yield 5-year average = 6.1%

Dividend rate = $ 1.74

Payout ratio = 134%

Dividend growth rate 3 year avg = 0.29%

Dividend growth rate 5 year avg = 1.16%

Consecutive dividend increases = 42 years

Paying dividends since = 1962

Total return last 3 years = 49.29%

Total return last 5 years = -9.26%

Notes

Net income and operating cash flow have generally been trending up for the past four years; it also a stellar record of increasing dividend payments. It has a weak interest rate coverage ratio of 1.2.

AstraZeneca Plc

Industry : Pharmaceuticals

Levered Free Cash Flow: $6.22B

Net income for the past three years

2008 = $6.13 billion

2009 = $7.55 billion

2010 = $8.09 billion

Total cash flow from operating activities

2008 = $8.75 billion

2009 = $11.74 billion

2010 = $10.68 billion

Key Ratios

P/E Ratio = 6.2

P/E High - Last 5 Yrs = 15.9

P/E Low - Last 5 Yrs = 5.6

Price to Sales = 1.78

Price to Book = 2.5

Price to Tangible Book = 24.92

Price to Cash Flow = 4.6

Price to Free Cash Flow = 11.6

Quick Ratio = 1.4

Current Ratio = 1.5

LT Debt to Equity = 0.31

Total Debt to Equity = 0.39

Interest Coverage = 13.5

Inventory Turnover = 1.7

Asset Turnover = 0.6

ROE = 42.73%

Return on Assets = 14.94%

200 day moving average = 46.05

Current Ratio = 1.49

Total debt = 9.34B

Book value = 17.99

Qtrly Earnings Growth = -8.3%

Dividend yield 5-year average = 5.4%

Dividend rate = $ 2.80

Payout ratio = 37%

Dividend growth rate 3 year avg = 10.96%

Dividend growth rate 5 year avg = 12.71%

Consecutive dividend increases = 9 years

Paying dividends since = 1993

Total return last 3 years = 42.93%

Total return last 5 years = -1.32%

EPS charts were sourced from zacks.com and dividend history charts were 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 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 Interesting Stocks With Superb Yields