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Today, we are going to look at five stocks that offer high yields, but investors should not base their investment decision on yield alone. It would be wise to get a handle on some of the key metrics mentioned below. 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 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. 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 Stocks With Superb Yields.

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 5 Interesting Communication Plays

Our favorite play on the list is Terra Nitrogen Co., L.P. (NYSE:TNH), and we like it for the following reasons:

  • 5 year dividend average of 8%
  • 5 year dividend growth rate of 83%
  • Net income and operating cash flow have been trending upwards for the past 3 years and they both experienced huge gains in 2011.
  • A strong quarterly earnings growth rate of 180%
  • A strong quarterly revenue growth rate of 49%
  • A great ROE of 197% and ROA of 100%
  • A very good quick ratio of 5.50%
  • It has no debt at all
  • A pretty inventory turnover of 11.60
  • A strong interest coverage ratio of 9.8
  • A great current ratio of 7
  • 100k invested in TNH would have grown to a stunning $4.3 million.

Important facts investors should be aware in regards to investing in MLPs

Payout ratios are not that important when it comes to MLPS, which generally 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 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 declared per unit.

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 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

TNH

8.8

3.86B

14.5

459.10M

49.50%

0.65

740.8M

445.60M

RAI

5.50

23.7B

12.7

2.66B

0.11%

0.59

8.53B

1.1B

POR

4.30

1.90B

13.3

487.00M

-5.40%

0.65

1.79B

473.00M

VLCCF

13.0

378.59M

14.35

62.67M

15.40%

0.90

96.22M

42.61M

BNS

3.80

58.60B

10.37

N/A

10.50%

1.24

16.23B

1.06B

Terra Nitrogen Co., L.P.

It has a levered free cash flow rate of $228 million.

Net income for the past three years

  • 2008 = $422.3 million
  • 2009 = $123 million
  • 2010 = $201.6 million
  • 2011= It far stands at $378 million and could top the $500 million mark.

Total cash flow from operating activities

  • 2008 = $292 million
  • 2009 = $158 million
  • 2010 = $259 million
  • 2011= it stands at $376 and could top $508 million

Key Ratios

  • P/E Ratio = 15.00
  • P/E High - Last 5 Yrs = 27
  • P/E Low - Last 5 Yrs = 2.80
  • Price to Sales = 5.60
  • Price to Book = 15.39
  • Price to Tangible Book = 15.39
  • Price to Cash Flow = 10.10
  • Price to Free Cash Flow = 53.90
  • Quick Ratio = 5.50
  • Current Ratio = 7.00
  • LT Debt to Equity = 0.00
  • Total Debt to Equity = 0.00
  • Interest Coverage = 9.8
  • Inventory Turnover = 11.60
  • Asset Turnover = 2.70

  • ROE 197.82%
  • Return on assets 100.93%
  • Quarterly earnings growth rate 180.9%
  • Total debt 0
  • Book value 12.72
  • Dividend yield 5 year Average 8.0 %
  • Dividend rate $ 18.12
  • Payout ratio 99%
  • Dividend growth rate 5 year average 81.3 %
  • Consecutive dividend increases 3 years
  • Paying dividends since 1993
  • Total return last 3 years 105%
  • Total return last 5 years 506%

Positive developments

The dividend was increased from $3.96 to $4.53.

Reynolds American Inc (NYSE:RAI)

Industry: Tobacco Products

It has a strong levered free cash flow rate of 1.42 billion and a current ratio of 1.09

Net income for the past three years

  • 2008= $1.33 billion
  • 2009 =$962 million
  • 2010 = $1.13 billion
  • 2011= it stands at $1.024 billion and could potentially top the $1.4 billion mark.

Total cash flow from operating activities

  • 2008= $1.31 billion
  • 2009 =$1.45 billion
  • 2010 = $1.26 billion
  • 2011= It stands at roughly $841 million.

Key Ratios

  • P/E Ratio = 19.0
  • P/E High - Last 5 Yrs = 21.8
  • P/E Low - Last 5 Yrs = 9.6
  • Price to Sales = 2.09
  • Price to Book = 2.82
  • Price to Tangible Book = -7.88
  • Price to Cash Flow = 14.00
  • Price to Free Cash Flow = 49.60
  • Quick Ratio = 0.5
  • Current Ratio = 1.10
  • LT Debt to Equity = 0.48
  • Total Debt to Equity = 0.55
  • Interest Coverage = 10.50
  • Inventory Turnover = 4.60
  • Asset Turnover = 0.5

  • ROE 22%
  • Return on assets 9.8%
  • Total debt 3.67B
  • Book value 11.52
  • Qtrly Earnings Growth -1.6%
  • Dividend yield 5 year Average 6.10%
  • Dividend rate $ 2.24 %
  • Payout ratio 90.00%
  • Dividend growth rate 3 year average 8.33%
  • Dividend growth rate 5 year average 9.52%
  • Consecutive dividend increases 6 years
  • Total return last 3 years 126%
  • Total return last 5 years 52%

Notes

The high payout ratio is a bit of concern, but it's still below 100% and RAI generates more than enough cash flow to cover its dividend payments. It sports a great interest coverage ratio of 10.5, a very good 3 year total return of 126%, a good 5 year dividend growth rate of 9.5% and decent current ratio of 1.10. Finally, it has a very good strong levered free cash flow of $1.4 billion.

Portland General Electric Co. (NYSE:POR)

Industry: Electric Utilities

Levered Free Cash Flow: 136.62M

Net income for the past three years

  • 2008 = $87 million
  • 2009 = $95 million
  • 2010 = $125 million

Total cash flow from operating activities

  • 2008 = $183 million
  • 2009 = $386 million
  • 2010 = $391 million

Key Ratios

  • P/E Ratio = 13
  • P/E High - Last 5 Yrs = 30.7
  • P/E Low - Last 5 Yrs = 10.3
  • Price to Sales = 1.05
  • Price to Book = 1.13
  • Price to Tangible Book = 1.13
  • Price to Cash Flow = 5
  • Price to Free Cash Flow = 17.2
  • Quick Ratio = 0.6
  • Current Ratio = 1.4
  • LT Debt to Equity = 1.09
  • Total Debt to Equity = 1.09
  • Interest Coverage = 2.7
  • Inventory Turnover = 15.2
  • Asset Turnover = 0.3

  • ROE = 8.64%
  • Return on Assets = 3.37%
  • 200 day moving average = 24.26
  • Current Ratio = 1.45
  • Total debt = 1.80B
  • Book value = 21.94
  • Qtrly Earnings Growth = -44.9%
  • Dividend yield 5 year average = 4.7%
  • Dividend rate = $ 1.06
  • Payout ratio = 55%
  • Dividend growth rate 3 year avg = 2.84%
  • Dividend growth rate 5 year avg = 4.3%
  • Consecutive dividend increases = 5 years
  • Paying dividends since = 2006
  • Total return last 3 years = 53.26%
  • Total return last 5 years = 5.59%

Notes

Net income ahs been increasing for the past 3 years, it sports a very low payout ratio, has decent 5 year dividend average of 4.7%, a positive levered free cash flow of $136 million, and has a decent current ratio of 1.4.

Knightsbridge Tankers, Ltd. (NASDAQ:VLCCF)

Industry: Shipping

Levered Free Cash Flow: 28.97M

Net income for the past three years

  • 2008 = $48.06 million
  • 2009 = $21.68 million
  • 2010 = $38.56 million

Total cash flow from operating activities

  • 2008 = $69.69 million
  • 2009 = $34.57 million
  • 2010 = $62.48 million

Key Ratios

  • P/E Ratio = 12.7
  • P/E High - Last 5 Yrs = 13.5
  • P/E Low - Last 5 Yrs = 3.6
  • Price to Sales = 3.93
  • Price to Book = 1
  • Price to Tangible Book = 1
  • Price to Cash Flow = 6.7
  • Price to Free Cash Flow = -3.7
  • Quick Ratio = 4.2
  • Current Ratio = 6.9
  • LT Debt to Equity = 0.41
  • Total Debt to Equity = 0.42
  • Interest Coverage = 7.3
  • Inventory Turnover = N.A.
  • Asset Turnover = 0.2

  • ROE = 9.32%
  • Return on Assets = 4.69%
  • Total debt = 153.74M
  • Book value = 14.81
  • Qtrly Earnings Growth = 58%
  • Dividend yield 5 year average = 9.1%
  • Dividend rate = $ 2.00
  • Payout ratio = 169%
  • Dividend growth rate 3 year avg = 192.12%
  • Dividend growth rate 5 year avg = -18.81%
  • Consecutive dividend increases = 2 years
  • Paying dividends since = 1997
  • Total return last 3 years = 14.25%
  • Total return last 5 years = -5.8%

Warning: It has a rather high payout ratio and a negative 5 year dividend growth rate of -18%. On the positive side it sports a high quarterly earnings growth rate, decent interest coverage of 7.3 and a strong 3 year dividend growth average. However at this stage only individuals willing to take on a bit of extra risk should consider this play.

Bank of Nova Scotia Halifax (NYSE:BNS)

Industry: Banking

Levered Free Cash Flow: N/A

Net income for the past three years

  • 2009 = $3.3 billion
  • 2010 = $4.17 billion
  • 2011 = $5.21 billion

Total cash flow from operating activities

  • 2009 = $-10192 million
  • 2010 = $-2820 million
  • 2011 = $1.07 billion

Key Ratios

  • P/E Ratio = 11.4
  • P/E High - Last 5 Yrs = 22.5
  • P/E Low - Last 5 Yrs = 6.3
  • Price to Sales = 2.23
  • Price to Book = 2.1
  • Price to Tangible Book = 2.1
  • Price to Cash Flow = 12
  • Price to Free Cash Flow = N.A.
  • Quick Ratio = N.A.
  • Current Ratio = N.A.
  • LT Debt to Equity = 0.21
  • Total Debt to Equity = 0.75
  • Interest Coverage = 1.8
  • Inventory Turnover = N.A.
  • Asset Turnover = 0

  • ROE = 17.1%
  • Return on Assets = 0.96%
  • 200 day moving average = 51.14
  • Current Ratio = N/A
  • Total debt = 95.08B
  • Book value = 26.08
  • Qtrly Earnings Growth = 12%
  • Dividend yield 5 year average = 4.7%
  • Dividend rate = $ 2.08
  • Payout ratio = 44%
  • Dividend growth rate 3 year avg = 2.38%
  • Dividend growth rate 5 year avg = 7.81%
  • Consecutive dividend increases = 1 years
  • Paying dividends since = 1834
  • Total return last 3 years = 148.52%
  • Total return last 5 years = 41.06%

Notes

Net income has been increasing for the past 3 years, it has a low payout ratio a good 5 year dividend growth average of 7.8% and a decent quarterly earnings growth rate of 12%.

EPS and ROE % change charts sourced from zacks.com and 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 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 Candidates With Yields Up To 13%