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In today's low-interest-rate environment, investment-grade corporate bonds and government bonds offer very low yields. Investors seeking additional income in today's markets are tempted to purchase high yield debt and dividend-yielding stocks. Fixed income investors should realize that there is nothing for free, and that there are risks associated with higher returns. Investors should attempt to understand and weigh the risks of their holdings.

Fortunately, there are credit scoring systems that classify stocks into different risk classes according to quantitative measures. One predictive measure of bankruptcy for non-financial companies is the Altman Z-Score. This score places companies into three groups: "safe" (Z-score > 2.99), "grey" (Z-score between 2.99 and 1.81), and "distressed*" (Z-score < 1.81). This metric is surprisingly useful for identifying bankruptcy risk in the coming year. Altman's method of segmenting companies uses fundamental (financial statement) data and market capitalization only.** Beyond credit risk prediction, companies with higher Z-scores have been shown to outperform companies with lower Z-scores, in aggregate.

The Altman Z-score was recently calculated for hundreds of non-financial companies and combined with other financial metrics to find stocks with attractive dividend prospects. Several criteria were used:

  1. The stock's dividend payout ratio must be below 60%. This is used as a quick and dirty measure of short-term dividend stability.
  2. Each stock must have positive earnings per share growth over the last five years and is expected by analysts to have positive earnings per share growth over the next five years. This criterion is a metric of long-term dividend growth.
  3. Yields are in excess of 2.5% select for dividend stocks with yields in excess of the 10-year treasury which currently yields about 2.3%.
  4. Each stock scored in the "safe" zone according to the Altman Z-score.
  5. The geometric average of return on equity over the past 10 fiscal years was positive.

Companies which met these criteria are presented below:

Ticker

Company

Div Yield

Payout Ratio

Altman Z-score

10-Year Average ROE

P/E

ACO

Amcol International Corp.

2.52%

0.38

3.62

12.9%

15.4

ADI

Analog Devices Inc.

3.02%

0.37

7.83

16.3%

15.6

ALV

Autoliv, Inc.

2.73%

0.25

3.38

21.7%

10.4

AMAT

Applied Materials Inc.

2.81%

0.27

5.27

11.4%

11.1

APD

Air Products & Chemicals Inc.

2.53%

0.41

3.40

16.4%

16.6

APL

Atlas Pipeline Partners LP

5.94%

0.38

3.14

4.2%

7.2

ARLP

Alliance Resource Partners LP

5.94%

0.45

3.49

55.5%

8.2

ASEI

American Science & Engineering

2.85%

0.43

8.14

7.2%

21.8

BBY

Best Buy Co. Inc.

2.51%

0.21

3.28

21.3%

9.0

BMS

Bemis Company, Inc.

3.15%

0.57

3.12

13.2%

18.5

BOBE

Bob Evans Farms Inc.

2.63%

0.39

4.54

9.0%

16.5

BR

Broadridge Financial Solutions

2.62%

0.45

3.75

13.5%

18.1

CAG

ConAgra Foods, Inc.

3.63%

0.52

3.17

16.6%

14.6

CATO

Cato Corp.

3.27%

0.37

6.53

16.9%

13.2

CL

Colgate-Palmolive Co.

2.62%

0.45

6.72

160.6%

19.2

CMP

Compass Minerals International Inc.

2.77%

0.41

4.00

39.5%

16.1

CMTL

Comtech Telecommunications

3.37%

0.54

3.67

13.9%

20.0

CPB

Campbell Soup Co.

3.54%

0.50

4.69

86.1%

14.1

CRWS

Crown Crafts Inc.

3.86%

0.26

5.40

5.7%

8.5

CTB

Cooper Tire & Rubber Co.

2.55%

0.10

3.20

3.5%

4.1

CVX

Chevron Corporation

2.94%

0.23

4.57

20.2%

8.2

DBD

Diebold, Incorporated

2.95%

0.51

3.27

7.7%

17.1

DEST

Destination Maternity Corp.

3.78%

0.46

5.19

2.7%

12.2

DRI

Darden Restaurants, Inc.

3.28%

0.45

3.13

23.1%

16.1

EBF

Ennis Inc.

3.75%

0.43

4.60

11.0%

11.3

EMR

Emerson Electric Co.

3.06%

0.46

4.42

19.9%

16.8

GME

GameStop Corp.

2.55%

0.00

3.49

13.1%

8.6

GPC

Genuine Parts Company

3.15%

0.50

5.89

14.8%

17.6

HAS

Hasbro Inc.

4.06%

0.41

3.97

13.2%

12.4

HRB

H&R Block, Inc.

4.73%

0.48

3.17

19.1%

12.7

HSY

Hershey Co.

2.53%

0.48

6.11

48.3%

22.0

INTC

Intel Corporation

3.03%

0.31

5.70

14.9%

11.6

INTX

Intersections Inc.

6.29%

0.55

5.14

4.5%

11.9

JCOM

j2 Global, Inc.

2.79%

0.17

10.78

22.1%

12.5

K

Kellogg Company

3.27%

0.49

3.47

56.3%

15.6

KLAC

KLA-Tencor Corporation

2.69%

0.26

5.76

9.5%

11.7

KO

The Coca-Cola Company

2.91%

0.50

4.13

32.1%

19.0

KOP

Koppers Holdings Inc.

2.57%

0.49

3.79

10.4%

21.1

Kohl's Corp.

2.54%

0.23

3.83

16.6%

11.5

KWR

Quaker Chemical Corporation

2.51%

0.42

3.76

11.2%

11.5

LLTC

Linear Technology Corp.

2.96%

0.44

6.25

27.0%

15.9

MAT

Mattel Inc.

3.75%

0.42

5.20

21.8%

15.0

MCD

McDonald's Corp.

2.87%

0.47

6.32

20.9%

18.5

MMM

3M Co.

2.64%

0.36

5.40

31.8%

15.1

MSA

Mine Safety Appliances Co.

2.56%

0.55

3.54

15.7%

21.7

MXIM

Maxim Integrated Products Inc.

3.07%

0.52

7.58

13.1%

17.9

NAFC

Nash Finch Co.

2.51%

0.24

5.60

8.5%

10.5

NHC

National Healthcare Corp.

2.62%

0.29

3.46

13.8%

11.3

NRCI

National Research Corp.

2.57%

0.53

5.28

15.7%

24.0

OMI

Owens & Minor Inc.

2.92%

0.45

6.69

13.5%

16.7

PEP

Pepsico, Inc.

3.20%

0.50

3.19

34.8%

16.0

PG

Procter & Gamble Co.

3.12%

0.58

3.28

27.3%

19.8

PKG

Packaging Corp. of America

3.37%

0.51

3.25

14.6%

18.8

PM

Philip Morris International, Inc.

3.59%

0.58

6.68

43.2%

17.7

PSE

Pioneer Southwest Energy

7.82%

0.55

6.16

28.4%

7.0

SHLM

A. Schulman, Inc.

2.54%

0.43

3.98

6.2%

18.1

SON

Sonoco Products Co.

3.42%

0.53

3.53

14.0%

15.9

SPLS

Staples, Inc.

2.68%

0.28

4.19

16.4%

11.7

STRA

Strayer Education Inc.

3.99%

0.46

9.38

53.2%

11.4

SYY

Sysco Corp.

3.64%

0.54

6.89

32.6%

15.2

TESS

TESSCO Technologies Inc.

2.95%

0.27

5.74

9.5%

11.3

WAG

Walgreen Co.

2.63%

0.27

5.74

17.5%

11.6

WDFC

WD-40 Company

2.63%

0.52

7.05

22.0%

21.8

WMT

Wal-Mart Stores Inc.

2.61%

0.32

4.10

21.3%

13.4

WSTG

Wayside Technology Group

4.49%

0.54

5.81

10.3%

11.9

There are several large cap stocks in this list which trade at attractive price multiples. Chevron (NYSE:CVX) recently traded near $110 per share, making CVX shares trade at a price-to-book ratio of 1.8, a price-to-earnings multiple of 8.2, and a price-to-sales multiple of 0.9 (trailing twelve months). Similarly attractive, Intel Corporation (NASDAQ:INTC) recently traded near $28 per share. At this price level, shares of this large cap stock trade at a price-to-book ratio of 3.0, a price-to-earnings multiple of 11.6, and a price-to-sales multiple of 2.6 (trailing twelve months). Another large cap dividend company from this list which trades at attractive valuations is Wal-Mart Stores (NYSE:WMT). At $61 per share, WMT shares trade at a price-to-book ratio of 2.9, a price-to-earnings multiple of 13.4, and a price-to-sales multiple of 0.5 (trailing twelve months).

The firms on this list offer attractive dividend yields and have a low probability of bankruptcy. Thus, they offer good chances for attractive risk-adjusted returns. Dividend investors ought to scan this list for additional stocks to add to their dividend portfolios.

*"Distressed" was a label coined by researchers, and should not be taken to mean that any company is bankrupt or in default on the basis of this calculation alone. Credit scoring is not fate, only prediction based on relative past performance of companies grouped by key variables. Time will tell.

**Volatility has be incorporated into a credit scoring model to improve accuracy, but this would reduce the value of a fundamentals-only model for indicating companies for option strategies.

Disclaimer: This article was written to provide investor information and education, and should not be construed as a guarantee or investment advice. I have no idea what your individual risk, time-horizon, and tax circumstances are: please seek the personal advice of a financial planner. This article uses third-party data and may contain approximations and errors. Please check estimates and data for yourself before investing.

Source: 2012's Top Dividend Stocks To Beat Treasuries