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In this series what we are aiming to do is provide some key ratios and then pick one of the plays as our favorite play. We will provide some reasons for our choice and by doing this, we hope to impart some knowledge to those who are new to the field of dividend investing. A lot of ratios will be used in this article, and it would be best for investors to get a handle on some of these ratios as they could prove to be very useful in the selection process. Some of the more important key ratios are listed below.

Stock

Dividend Yield (%)

Forward PE

EBITDA

Quarterly Revenue Growth

Beta

Revenue

Operating Cash flow

LANC

2.10

1.69B

17.07

155.52M

-1.40%

0.39

1.09B

EVEP

4.40

27.69

184.09M

53.20%

0.86

243.42M

167.39M

CVX

3.10

8.06

51.10B

13.30%

0.78

236.29B

N/A

PCG

4.40

13.18

4.31B

9.90%

0.29

14.76B

4.12B

TOT

4.70

7.74

43.34B

20.10%

1.00

218.66B

25.65B

Long-term debt-to-equity ratio is the total long term debt divided by the total equity. The amount of long-term debt a company carries on its balances sheet is very important for it indicates the amount of money a company owes that it doesn't expect to pay off in the next year. A balance sheet that illustrates that long term debt has been decreasing for a few years is a sign that the company is doing well. When debt levels fall, and cash levels increase the balance sheet is said to be improving and vice versa. If a company has too much debt on its books, it could end up being overwhelmed with interest payments and risk having too little working capital which could in the worst case scenario lead to bankruptcy.

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.

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 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 Splendid Plays With Superb Yields.

Interest coverage is usually calculated by dividing the earnings before interest and taxes for a period of one 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.

Inventory turnover is calculated by dividing sales by inventory. If a company generated $30 million in sales and had an average inventory of $6 million; the inventory turn over would be equal to 5. This value indicates that there are 5 inventory turnovers per year. This means that it takes roughly 2.4 months to sell the inventory. A low inventory turnover is a sign of inefficiency and vice versa.

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.

We generally base our choice on the following factors

Net income - It should be generally trending upwards for the past 3-4 years.

Total cash flow from operating activities it also should be trending upwards for the past 3-4 years. Payout ratio - It should generally be below 100%, but a ratio below 70% is optimal. Payout ratios are not that important when it comes to MLPS/REITs as they 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.

Current ratio - Should be above 1

Interest coverage ratio - Any value above 1.5 is okay, but we would aim for 2.5-3.00 as our starting range. The higher the number the better/

Dividend growth rate - It should be at 5% or higher. A high yield with a low dividend growth rate is not good in the long run, but neither is a low dividend yield with a high growth rate; one needs to find an equilibrium here.

Five year dividend average - We generally aim for stocks that have a yield of 4.5% or higher. There are exceptions to this rule. Some stocks appreciate very fast, so even though the yield might be low, one can more than make up the difference through capital gains. One example is JAH.

Sales - They should generally be trending upwards for the past 3-4 years.

Levered free cash flow - This is the icing on the cake, if a company meets most of the above requirements and also has a positive levered free cash flow; it can generally be viewed as a good long term buy. Two examples are LEG and PG.

An early warning signal that the company could be in trouble is when the total cash flow generated from operating expenses is not enough to meet the dividend payments. This information can be gleaned by looking at the cash flow statement; this is readily available at Yahoo Finance. In the example below we used LEG and the data was obtained from Yahoo Finance.

The cash flow in this case was more than enough to easily cover all the dividend payments for all the above years; in this the time period was from 2008-2010.

Many traders use other metrics and that is fine. We are just trying to provide a guideline. As you get better handle of the ratios explained below you can create your own list of criteria.

EV Energy Partners LP (NASDAQ:EVEP) is our play of choice for the following reasons:

It has a very good 5 year dividend yield average of 9.1%

Both net income and operating cash flow have generally been trending upwards for the past 4 years. Net income is set to surge in 2011 and could come in almost 80% higher than 2010.

It has very strong 3 year total return of 358%

It has consecutively increased dividend payments from day 1

A strong quick and current ratio of 3.5 and 3.5 respectively

A good total debt to equity ratio of .54

It also sports a decent interest coverage ratio of 4.3

It has a levered free cash flow of $74 million

100K invested for 5 years would have grown $339K

Lancaster Colony Corp. (NASDAQ:LANC)

Industry: Food

Levered Free Cash Flow: 83.65M

Net income for the past three years

Net Income ($mil) 2009 = $89

Net Income ($mil) 2010 = $115

Net Income ($mil) 2011 = $106

Total cash flow from operating activities

2009 = $133.17 million

2010 = $107.7 million

2011 = $147.46 million

Key Ratios

P/E Ratio = 18.6

P/E High - Last 5 Yrs = 49.1

P/E Low - Last 5 Yrs = 8.2

Price to Sales = 1.7

Price to Book = 3.42

Price to Tangible Book = 4.16

Price to Cash Flow = 16.13

Price to Free Cash Flow = 26

Quick Ratio = 2.91

Current Ratio = 4.91

LT Debt to Equity = 0

Total Debt to Equity = 0

Interest Coverage = N/A

Inventory Turnover = 8.23

Asset Turnover = 1.69

ROE = 17.55%

Return on Assests = 14.58%

Qtrly Earnings Growth = -12.9%

Dividend yield 5 year average = 2.58%

Payout ratio = 0.43

Dividend growth rate 3 year avg = 6.31%

Dividend growth rate 5 year avg = 5.36%

Consecutive dividend increases = 42 years

Paying dividends since = 1963

Total return last 3 years = 81.77%

Total return last 5 years = 66.52%

Notes

It has a low payout ratio of 43%, a good 3 year return of 81%, a good quick ratio of 2.91 and a strong current ratio of 3.91 and finally it has consecutively increased its dividend for 42 years. LANC is a true dividend champion.

VimpelCom Ltd. (NASDAQ:VIP)

Industry : Services

Levered Free Cash Flow: 1.82B

Net income for the past three years

Net Income ($mil) 2009 = $1117

Net Income ($mil) 2010 = $1721

Net Income ($mil) 2011 = $N/A

Total cash flow from operating activities

2009 = $3.52 billion

2010 = $3.68 billion

Key Ratios

P/E Ratio = 11.7

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

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

Price to Sales = 1.13

Price to Book = 1.09

Price to Tangible Book = -1.51

Price to Cash Flow = 3.29

Price to Free Cash Flow = -36.1

Quick Ratio = 1.11

Current Ratio =1.09

LT Debt to Equity = 1.6

Total Debt to Equity = 1.36

Interest Coverage = 0.05

Inventory Turnover = N/A

Asset Turnover = 0.31

ROE = 10.03%

Return on Assets = 4.21%

Quarterly Earnings Growth = -79%

Dividend yield 5 year average = N/A%

Payout ratio = 69.8%

Consecutive dividend increases = 1 years

Paying dividends since = 2010

Total return last 3 years = N/A

Total return last 5 years = N/A

Notes

It has a strong levered free cash flow of $1.8 billion, a manageable payout ratio of 69%, an acceptable quick and current ratio of 1.11 and 1.09 respectively. On the negative side, quarterly earnings growth has taken a massive beating (-79%), it has high LT debt to equity ratio of 1.6, a very weak interest coverage ratio and short dividend history. Only risk takers should consider this play for now.

EV Energy Partners LP

Industry: Production & Extraction

Levered Free Cash Flow: 74.67M

Net income for the past three years

2008 = $225.49 million

2009 = $1.41 million

2010 = $106.06 million

2011 = it stands at $95 million and could come in as high as $183 million

Total cash flow from operating activities

2008 = $104.38 million

2009 = $109.53 million

2010 = $122.36 million

2011= it stands at $134 and come in as high as $186

Key Ratios

P/E Ratio = 43.9

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

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

Price to Sales = 9.76

Price to Book = 2.53

Price to Tangible Book = 2.53

Price to Cash Flow = 15.7

Price to Free Cash Flow = 42.7

Quick Ratio = 3.5

Current Ratio = 3.5

LT Debt to Equity = 0.54

Total Debt to Equity = 0.54

Interest Coverage = 4.3

Inventory Turnover = N.A.

Asset Turnover = 0.2

ROE = 8.96%

Return on Assets = 4.6%

Total debt = 505.35M

Book value = 27.79

Qtrly Earnings Growth = 51%

Dividend yield 5 year average = 9.1%

Dividend rate = $ 3.04

Payout ratio = 194%

Dividend growth rate 3 year avg = 2.63%

Consecutive dividend increases = 4 years

Paying dividends since = 2007

Total return last 3 years = 358.22%

Total return last 5 years = 221.66%

Chevron Corporation (NYSE:CVX)

Industry: Refining and Marketing

Free cash flow= $40.2 billion

Net income for the past three years

2008 = $23.94 billion

2009 = $10.49 billion

2010 = $19.03 billion

2011 = it stands at $21 billion and could top the $30 billion mark.

Total cash flow from operating activities

2008 = $29.64 billion

2009 = $19.38 billion

2010 = $31.36 billion

2011= It stands at $32 billion and could top the $42 billion mark

Key Ratios

P/E Ratio = 7.8

P/E High - Last 5 Yrs = 15.2

P/E Low - Last 5 Yrs = 4.8

Price to Sales = 0.85

Price to Book = 1.73

Price to Tangible Book = 1.8

Price to Cash Flow = 5.2

Price to Free Cash Flow = 32.1

Quick Ratio = 1.3

Current Ratio = 1.6

LT Debt to Equity = 0.08

Total Debt to Equity = 0.08

Interest Coverage = 1951

Inventory Turnover = 27.2

Asset Turnover = 1.3

ROE = 23.75%

Return on Assets = N/A

200 day moving average = 101.19

Total debt = 9.74B

Book value = 60.7

Qtrly Earnings Growth = -3.2%

Dividend yield 5 year average = 3.3%

Dividend rate = $ 3.24

Payout ratio = 23%

Dividend growth rate 3 year avg = 6.98%

Dividend growth rate 5 year avg = 8.19%

Paying dividends since = 1912

Total return last 3 years = 63.13%

Total return last 5 years = 66.3%

Notes

Net income and operating cash flow are trending upwards for the past few years. It has a very strong levered free cash flow of $40 billion, a decent 5 year average of 3.3%, a strong 5 year dividend growth rate of 8%, has consecutively increased dividends for over 19 years, and sports an incredibly strong interest coverage ratio of 1951. It is a true dividend king as it has been paying dividends since 1912.

PG&E Corp. (NYSE:PCG)

Industry: Electric Utilities

Levered Free Cash Flow: -913.00M

Net income for the past three years

2008 = $1.2 billion

2009 = $1.24 billion

2010 = $1.12 billion

2011 = It stands at $771 million and could top the $1 billion mark.

Total cash flow from operating activities

2008 = $2.77 billion

2009 = $3.04 billion

2010 = $3.21 billion

2011= it stands at $3.2 billion and could top the $4.5 billion mark.

Key Ratios

P/E Ratio = 16.3

P/E High - Last 5 Yrs = 18.8

P/E Low - Last 5 Yrs = 8.3

Price to Sales = 1.14

Price to Book = 1.41

Price to Tangible Book = 1.41

Price to Cash Flow = 5.3

Price to Free Cash Flow = -30.4

Quick Ratio = 0.3

Current Ratio = 0.9

Total Debt to Equity = 1.11

Interest Coverage = 3.1

Inventory Turnover = 26.4

Asset Turnover = 0.3

ROE = 8.61%

Return on Assets = 2.73%

200 day moving average = 40.94

Total debt = 13.23B

Book value = 29.67

Qtrly Earnings Growth = -22.5%

Dividend yield 5 year average = 4%

Dividend rate = $ 1.82

Payout ratio = 72%

Dividend growth rate 3 year avg = 5.34%

Dividend growth rate 5 year avg = 7.23%

Consecutive dividend increases = 6 years

Paying dividends since = 1990

Total return last 3 years = 24.9%

Total return last 5 years = 3.71%

Notes

It has a manageable payout ratio of 72% and a decent five year dividend average of 4%. On the negative side it has a negative levered free cash flow, a negative quarterly earnings growth rate -22.5% and net income appears to be dropping for the past few years. Operating cash flow, on the other hand seems to be trending upwards for the past few years.

Total S.A. (NYSE:TOT)

Industry: Production and Extraction

Levered Free Cash Flow: 5.16B

Net income for the past three years

2008 = $15.45 billion

2009 = $261 million

2010 = $317 million

Total cash flow from operating activities

2008 = $26.32 billion

2009 = $17.74 billion

2010 = $24.81 billion

Key Ratios

P/E Ratio = 7.6

P/E High - Last 5 Yrs = 13.9

P/E Low - Last 5 Yrs = 5.7

Price to Sales = 0.56

Price to Book = 1.37

Price to Tangible Book = 1.63

Price to Cash Flow = 4.7

Price to Free Cash Flow = -22.7

Quick Ratio = 0.9

Current Ratio = 1.4

LT Debt to Equity = 0.34

Total Debt to Equity = 0.5

Interest Coverage = 32.6

Inventory Turnover = 5.6

Asset Turnover = 0.9

ROE = 19.26%

Return on Assets = 10.22%

200 day moving average = 49.53

Current Ratio = 1.36

Total debt = 42.32B

Book value = 39.63

Qtrly Earnings Growth = 12.8%

Dividend yield 5 year average = 5.3%

Dividend rate = $ 4.15

Payout ratio = 37%

Dividend growth rate 3 year avg = 0.43%

Dividend growth rate 5 year avg = 9.03%

Consecutive dividend increases = 0 years

Paying dividends since = 1992

Total return last 3 years = 18.65%

Total return last 5 years = -2.13%

Notes

It sports a very low payout ratio of 37%, a decent five year dividend average of 5.3%, a strong 5 year dividend growth rate of 9%, a good current ratio of 1.4, a low LT debt to Equity ratio of 0.34 and very strong interest coverage ratio of 32.6.

Conclusion

Long term players would be best served by waiting for a strong pullback before committing new money to this market.

Earnings and growth estimate charts sourced from dailyfinance.com and 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.

Additional disclosure: 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: Dividend Champs With Good Yields