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In this series what we are aiming to do is provide a wealth of key ratios and then pick one of the plays as our favorite play. We will go on to provide some reason for this choice and in doing so, 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.

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.

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. Some examples are JAH, AUY, RGLD, etc.

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.

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 balance 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.

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.

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 than 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. Individuals searching for other ideas might find this article to be of interest Yanzhou Coal Mining Co. Ltd: A Good Long-Term Play.

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.

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 earnings ratio.

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.

Asset turnover is calculated by dividing revenues by assets. It measures a firm's effectiveness at using its assets in generating revenue. Higher numbers are generally better and vice versa. In general companies with low profit.

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 Reasons To Be Bullish On Hatteras Financial Corp.

CVS Caremark Corporation Common (NYSE:CVS) is our favorite play on this list for the following reasons:

It has a very good free cash flow of $4.00 billion.

It has a strong five-year dividend growth rate of 23%.

EBITDA has increased from $7.8 billion in 2009 to $7.89 billion in 2011.

Cash flow per share has increased from $3.80 in 2009 to $4.10 in 2011.

Sales have surged nicely from $9.8 billion in 2009 to almost $11 billion in 2011.

Annual EPS before NRI has increased from $2.07 in 2007 to $2.80 in 2011.

It has a very low payout ratio of 18% and a five-year average payout ratio of only 14%.

It has a five-year sales growth of 16%.

A very good long-term debt to equity ratio of 0.24.

While the quick ratio is weak, a current ratio of 1.56 and a very strong interest coverage ratio of 13.23 make up for this shortfall.

It has a decent quarterly revenue growth rate of 15.2%.

A good free cash flow yield of 6.7%.

A decent three-year total return of 76%.

It maintains its sturdy performance in the retail division with a 2.5% increase in same-store sales (at the top of its guidance range of 0.5-2.5%), which contributed to a 4% increase in retail revenues.

It also achieved an impressive saving of $700 million via purchasing synergies and overhead savings from its retail-PBM combination. These savings should facilitate future growth.

It ended the year on a strong note with cash and cash equivalents of $1.41 billion, which was comparable to the $1.42 billion at the end of 2010. It generated over $4.6 billion in free cash and it expects to generate $4.6-$4.9 billion in free cash flow in 2012.

In the fourth quarter of 2012, it completed its $2 billion share repurchase program, which began in 2010.

100k invested for 10 years would have grown to 291K.

Company: CVS Caremark Cp

Levered Free Cash Flow = 4.00B

Basic Key ratios

Percentage Held by Insiders = 0.94

Market Cap ($mil) = 59441

Number of Institutional Sellers 12 Weeks = 1

Growth

Net Income ($mil) 12/2011 = 3461

Net Income ($mil) 12/2010 = 3427

Net Income ($mil) 12/2009 = 3696

12months Net Income this Quarterly/ 12months Net Income 4Q's ago = 0.99

Quarterly Net Income this Quarterly/ same Quarter year ago = 3.7

EBITDA ($mil) 12/2011 = 7898

EBITDA ($mil) 12/2010 = 7606

EBITDA ($mil) 12/2009 = 7814

Net Income Reported Quarterlytr ($mil) = 1064

Annual Net Income this Yr/ Net Income last Yr = 0.99

Cash Flow ($/sh) 12/2011 = 4.1

Cash Flow ($/sh) 12/2010 = 3.81

Cash Flow ($/sh) 12/2009 = 3.8

Sales ($mil) 12/2011 = 107100

Sales ($mil) 12/2010 = 96413

Sales ($mil) 12/2009 = 98729

Annual EPS before NRI 12/2007 = 2.07

Annual EPS before NRI 12/2008 = 2.44

Annual EPS before NRI 12/2009 = 2.74

Annual EPS before NRI 12/2010 = 2.69

Annual EPS before NRI 12/2011 = 2.8

Dividend history

Dividend Yield = 1.42

Dividend Yield 5 Year Average = 1.00%

Annual Dividend 12/2011 = 0.5

Annual Dividend 12/2010 = 0.35

Forward Yield = 1.42

Dividend 5 year Growth = 23%

Dividend sustainability

Payout Ratio 06/2011 = 0.18

Payout Ratio 5 Year Average 06/2011 = 0.14

Change in Payout Ratio = 0.04

Performance

Percentage Change Price 52 Weeks Relative to S&P 500 = 27.72

Next 3-5 Year Estimate EPS Growth rate = 11.83

EPS Growth Quarterly(1)/Q(-3) = -111.25

ROE 5 Year Average 06/2011 = 9.97

Debt/Total Cap 5 Year Average 06/2011 = 19.22

Current Ratio 06/2011 = 1.56

Current Ratio 5 Year Average = 1.44

Quick Ratio = 0.72

Cash Ratio = 0.21

Interest Coverage Quarterly = 13.23

Valuation

Book Value Quarterly = 29.23

Price/ Book = 1.56

Price/ Cash Flow = 11.14

Price/ Sales = 0.55

EV/EBITDA 12 Mo = 8.51

Company: IBM (NYSE:IBM)

Levered Free Cash Flow = 11.60B

Basic Key ratios

Percentage Held by Insiders = 0.24

Market Cap ($mil) = 232451

Number of Institutional Sellers 12 Weeks = 17

Growth

Net Income ($mil) 12/2011 = 15855

Net Income ($mil) 12/2010 = 14833

Net Income ($mil) 12/2009 = 13425

12months Net Income this Quarterly/ 12months Net Income 4Q's ago = 6.9

Quarterly Net Income this Quarterly/ same Quarter year ago = 4.43

EBITDA ($mil) 12/2011 = 26229

EBITDA ($mil) 12/2010 = 24922

EBITDA ($mil) 12/2009 = 23534

Net Income Reported Quarterlytr ($mil) = 5490

Annual Net Income this Yr/ Net Income last Yr = 6.89

Cash Flow ($/sh) 12/2011 = 17.82

Cash Flow ($/sh) 12/2010 = 15.83

Cash Flow ($/sh) 12/2009 = 14.02

Sales ($mil) 12/2011 = 106916

Sales ($mil) 12/2010 = 99870

Sales ($mil) 12/2009 = 95758

Annual EPS before NRI 12/2007 = 7.13

Annual EPS before NRI 12/2008 = 8.93

Annual EPS before NRI 12/2009 = 10.01

Annual EPS before NRI 12/2010 = 11.52

Annual EPS before NRI 12/2011 = 13.38

Dividend history =

Dividend Yield = 1.5

Dividend Yield 5 Year Average = 1.7%

Annual Dividend 12/2011 = 2.9

Annual Dividend 12/2010 = 2.5

Forward Yield = 1.5

Dividend 5 year Growth = 20%

Dividend sustainability

Payout Ratio 06/2011 = 0.22

Payout Ratio 5 Year Average 06/2011 = 0.23

Change in Payout Ratio = 0

Performance

Percentage Change Price 52 Weeks Relative to S&P 500 = 17.51

Next 3-5 Year Estimate EPS Growth rate = 10.68

EPS Growth Quarterly(1)/Q(-3) = -112.68

ROE 5 Year Average 06/2011 = 58.57

Return on Investment 06/2011 = 36.13

Debt/Total Cap 5 Year Average 06/2011 = 48.89

Current Ratio 06/2011 = 1.21

Current Ratio 5 Year Average = 1.17

Quick Ratio = 1.15

Cash Ratio = 1.11

Interest Coverage Quarterly = 64.81

Valuation

Book Value Quarterly = 17.17

Price/ Book = 11.69

Price/ Cash Flow = 11.26

Price/ Sales = 2.17

EV/EBITDA 12 Mo = 9.28

Company: Ingersoll Rand (NYSE:IR)

Levered Free Cash Flow = 2.07B

Basic Key ratios

Percentage Held by Insiders = 0.11

Market Cap ($mil) = 11669

Growth

Net Income ($mil) 12/2011 = 343

Net Income ($mil) 12/2010 = 642

Net Income ($mil) 12/2009 = 451

12months Net Income this Quarterly/ 12months Net Income 4Q's ago = -46.57

Quarterly Net Income this Quarterly/ same Quarter year ago = 14.19

EBITDA ($mil) 12/2011 = 1296

EBITDA ($mil) 12/2010 = 1731

EBITDA ($mil) 12/2009 = 1317

Net Income Reported Quarterlytr ($mil) = 242

Annual Net Income this Yr/ Net Income last Yr = -46.56

Cash Flow ($/sh) 12/2011 = 4.36

Cash Flow ($/sh) 12/2010 = 3.69

Cash Flow ($/sh) 12/2009 = 3.01

Sales ($mil) 12/2011 = 14782

Sales ($mil) 12/2010 = 14079

Sales ($mil) 12/2009 = 13195

Annual EPS before NRI 12/2007 = 2.48

Annual EPS before NRI 12/2008 = 3.34

Annual EPS before NRI 12/2009 = 1.65

Annual EPS before NRI 12/2010 = 2.23

Annual EPS before NRI 12/2011 = 2.82

Dividend history

Dividend Yield = 1.63

Dividend Yield 5 Year Average 12/2011 = 2.00%

Annual Dividend 12/2011 = 0.43

Annual Dividend 12/2010 = 0.28

Forward Yield = 1.63

Dividend 5 year Growth 12/2011 = 3.00%

Dividend sustainability

Payout Ratio 06/2011 = 0.17

Payout Ratio 5 Year Average 06/2011 = 0.19

Change in Payout Ratio = -0.02

Performance

Percentage Change Price 52 Weeks Relative to S&P 500 = -19.76

Next 3-5 Year Estimate EPS Growth rate = 11

EPS Growth Quarterly(1)/Q(-3) = -122.58

ROE 5 Year Average 06/2011 = 11.91

Return on Investment 06/2011 = 8.82

Debt/Total Cap 5 Year Average 06/2011 = 23.51

Current Ratio 06/2011 = 1.26

Current Ratio 5 Year Average = 1.37

Quick Ratio = 0.95

Cash Ratio = 0.43

Interest Coverage Quarterly = 2.88

Valuation

Book Value Quarterly = 22.46

Price/ Book = 1.75

Price/ Cash Flow = 9

Price/ Sales = 0.81

EV/EBITDA 12 Mo = 10.33

Company: American Express Co (NYSE:AXP)

Free Cash Flow = $9.2 billion

Basic Key ratios

Percentage Held by Insiders = 1.48

Market Cap ($mil) = 62057

Number of Institutional Sellers 12 Weeks = 3

Growth

Net Income ($mil) 12/2011 = 4935

Net Income ($mil) 12/2010 = 4057

Net Income ($mil) 12/2009 = 2130

12months Net Income this Quarterly/ 12months Net Income 4Q's ago = 19.68

Quarterly Net Income this Quarterly/ same Quarter year ago = 12.19

EBITDA ($mil) 12/2011 = 10194

EBITDA ($mil) 12/2010 = 9304

EBITDA ($mil) 12/2009 = 6118

Net Income Reported Quarterlytr ($mil) = 1178

Annual Net Income this Yr/ Net Income last Yr = 21.64

Cash Flow ($/sh) 12/2011 = 4.99

Cash Flow ($/sh) 12/2010 = 4.15

Cash Flow ($/sh) 12/2009 = 2.42

Sales ($mil) 12/2011 = 28850

Sales ($mil) 12/2010 = 27819

Sales ($mil) 12/2009 = 24523

Annual EPS before NRI 12/2007 = 3.43

Annual EPS before NRI 12/2008 = 2.42

Annual EPS before NRI 12/2009 = 1.54

Annual EPS before NRI 12/2010 = 3.41

Annual EPS before NRI 12/2011 = 4.12

Dividend history

Dividend Yield = 1.35

Dividend Yield 5 Year Average 12/2011 = 2.3%

Annual Dividend 12/2011 = 0.72

Annual Dividend 12/2010 = 0.72

Forward Yield = 1.35

Dividend 5 year Growth 12/2011 = 5.00%

Dividend sustainability

Payout Ratio 06/2011 = 0.18

Payout Ratio 5 Year Average 06/2011 = 0.28

Change in Payout Ratio = -0.11

Performance

Percentage Change Price 52 Weeks Relative to S&P 500 = 14.31

Next 3-5 Year Estimate EPS Growth rate = 11.33

EPS Growth Quarterly(1)/Q(-3) = -110.64

ROE 5 Year Average 06/2011 = 26.52

Return on Investment 06/2011 = 6.12

Debt/Total Cap 5 Year Average 06/2011 = 80.66

Current Ratio 06/2011 = 1.21

Current Ratio 5 Year Average = 1.71

Quick Ratio = 1.21

Cash Ratio = 0.44

Interest Coverage Quarterly = 4.04

Valuation

Book Value Quarterly = 16.18

Price/ Book = 3.29

Price/ Cash Flow = 10.67

Price/ Sales = 2.11

EV/EBITDA 12 Mo = 11.51

Company: Torchmark Corp (NYSE:TMK)

Levered Free Cash Flow = 1.39B

Basic Key ratios

Percentage Held by Insiders = 5.97

Market Cap ($mil) = 4886

Number of Institutional Sellers 12 Weeks = 3

Growth

Net Income ($mil) 12/2011 = 518

Net Income ($mil) 12/2010 = 517

Net Income ($mil) 12/2009 = 405

12months Net Income this Quarterly/ 12months Net Income 4Q's ago = 0.19

Quarterly Net Income this Quarterly/ same Quarter year ago = -18.38

EBITDA ($mil) 12/2011 = 1258

EBITDA ($mil) 12/2010 = 1288

EBITDA ($mil) 12/2009 = 1076

Net Income Reported Quarterlytr ($mil) = 126

Annual Net Income this Yr/ Net Income last Yr = 0.16

Cash Flow ($/sh) 12/2011 = 9.21

Cash Flow ($/sh) 12/2010 = 7.76

Cash Flow ($/sh) 12/2009 = 7.45

Sales ($mil) 12/2011 = 3377

Sales ($mil) 12/2010 = 3128

Sales ($mil) 12/2009 = 3171

Annual EPS before NRI 12/2007 = 3.63

Annual EPS before NRI 12/2008 = 3.87

Annual EPS before NRI 12/2009 = 3.98

Annual EPS before NRI 12/2010 = 4.05

Annual EPS before NRI 12/2011 = 4.68

Dividend history =

Dividend Yield = 0.98

Dividend Yield 5 Year Average 12/2011 = 1.3%

Annual Dividend 12/2011 = 0.41

Annual Dividend 12/2010 = 0.41

Forward Yield = 1.23

Dividend 5 year Growth 12/2011 = 6.5%

Dividend sustainability

Payout Ratio 06/2011 = 0.1

Payout Ratio 5 Year Average 06/2011 = 0.1

Change in Payout Ratio = 0.01

Performance

Percentage Change Price 52 Weeks Relative to S&P 500 = 6.82

Next 3-5 Year Estimate EPS Growth rate = 9.5

EPS Growth Quarterly(1)/Q(-3) = -119.42

ROE 5 Year Average 06/2011 = 15.89

Return on Investment 06/2011 = 10.66

Debt/Total Cap 5 Year Average 06/2011 = 17.17

Current Ratio 06/2011 = 0.05

Current Ratio 5 Year Average = 0.23

Quick Ratio = 0.05

Cash Ratio = 0.01

Interest Coverage Quarterly = 10.35

Valuation

Book Value Quarterly = 41.48

Price/ Book = 1.18

Price/ Cash Flow = 5.29

Price/ Sales = 1.46

EV/EBITDA 12 Mo = 4.43

EPS, Price, EPS surprise charts obtained from zacks.com. Dividend history charts sourced from dividata.com. Free cash flow yield, income from continuing operations and revenue growth charts sourced from Ycharts.com. Earnings estimates and growth rate charts for sourced from dailyfinance.com. A major portion of the historical data used in this article as obtained from zacks.com

Source: 5 Splendid Dividend Plays

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.