2012's Top Dividend Stocks To Beat Treasuries

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 (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 (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 (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

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.