Many investors rely on dividends as a source of income, so if you're considering dividend stocks for this purpose, it's important to check that a stock's dividends are sustainable. If a company is currently paying higher dividends than they should, investors might see their dividend get cut.
Profits are the primary source for a company's dividends, so a profitability analysis should be top on the list. To illustrate this, we ran a screen on stocks paying dividend yields between 1-7% (yields beyond 7% may be unsustainably high) and payout ratios below 50%. The payout ratio is dividend per share/earnings per share, and the lower the ratio the more sustainable the dividend.
To check for strong profitability, we screened these dividend stocks using DuPont analysis.
DuPont analyzes return on equity (net income/equity) profitability by breaking ROE up into three components:
= (Net Profit/Equity)
= (Net profit/Sales)*(Sales/Assets)*(Assets/Equity)
= (Net Profit margin)*(Asset turnover)*(Leverage ratio)
It therefore focuses on companies with the following positive characteristics: Increasing ROE along with,
- Decreasing leverage, (i.e. decreasing Asset/Equity ratio)
- Improving asset use efficiency (i.e. increasing Sales/Assets ratio) and improving net profit margin (i.e. increasing Net Income/Sales ratio)
Companies with all of these characteristics are experiencing increasing profits due to operations and not to increased use of financial leverage. The companies listed below have all three positive attributes found from DuPont.
Finally, we screened for sufficient liquidity as well, with current ratios above 3. Sources of liquidity such as cash and marketable securities can help fund a dividend if a company's profits temporarily dip.
Interactive Chart: Press Play to compare changes in market cap over the last two years for the top six stocks mentioned below. Analyst ratings sourced from Zacks Investment Research.
Do you think these stocks could continue paying their dividends indefinitely? Use this list as a starting point for your own analysis.
1. Advance America, Cash Advance Centers Inc. (AEA): Provides cash advance services in the United States, the United Kingdom, and Canada. Market cap at $655.42M.Dividend yield at 2.39%, payout ratio at 23.06%.Current ratio at 4.67. MRQ net profit margin at 14.54% vs. 9.83% y/y. MRQ sales/assets at 0.375 vs. 0.371 y/y. MRQ assets/equity at 1.684 vs. 1.836 y/y.
2. Albemarle Corp. (ALB): Develops, manufactures, and markets engineered specialty chemicals in the United States and internationally. Market cap at $5.66B.Dividend yield at 1.26%, payout ratio at 13.86%.Current ratio at 3.38. MRQ net profit margin at 14.06% vs. 14.05% y/y. MRQ sales/assets at 0.221 vs. 0.197 y/y. MRQ assets/equity at 2.013 vs. 2.167 y/y.
3. Cascade Corp. (CASC-OLD): Manufactures loading devices and replacement parts primarily for the lift-truck and construction industry. Market cap at $613.50M.Dividend yield at 1.81%, payout ratio at 15.47%.Current ratio at 3.67. MRQ net profit margin at 14.18% vs. 8.18% y/y. MRQ sales/assets at 0.343 vs. 0.291 y/y. MRQ assets/equity at 1.353 vs. 1.524 y/y.
4. Columbia Sportswear Company (COLM): Engages in the design, development, sourcing, marketing, and distribution of outdoor apparel, footwear, accessories, and equipment in the United States, Latin America, the Asia Pacific, Europe, the Middle East, Africa, and Canada. Market cap at $1.60B.Dividend yield at 1.86%, payout ratio at 28.08%.Current ratio at 3.93. MRQ net profit margin at 6.98% vs. 5.73% y/y. MRQ sales/assets at 0.381 vs. 0.353 y/y. MRQ assets/equity at 1.287 vs. 1.292 y/y.
5. Hillenbrand, Inc. (HI): Manufactures, distributes, and sells funeral service products to licensed funeral directors operating licensed funeral homes. Market cap at $1.44B.Dividend yield at 3.33%, payout ratio at 42.70%.Current ratio at 3.18. MRQ net profit margin at 13.51% vs. 12.84% y/y. MRQ sales/assets at 0.199 vs. 0.193 y/y. MRQ assets/equity at 2.543 vs. 2.733 y/y.
6. Hawkins Inc. (HWKN): Distributes bulk and specialty chemicals in the United States. Market cap at $400.30M.Dividend yield at 1.67%, payout ratio at 31.60%.Current ratio at 3.44. MRQ net profit margin at 6.59% vs. 6.02% y/y. MRQ sales/assets at 0.439 vs. 0.411 y/y. MRQ assets/equity at 1.248 vs. 1.255 y/y.
7. Resources Connection Inc. (RECN): Provides professional services in provides finance, accounting, risk management and internal audit, corporate advisory, strategic communications and restructuring, information management, human capital, supply chain management, actuarial, and legal and regulatory services in support of client-led projects and initiatives. Market cap at $601.37M.Dividend yield at 1.43%, payout ratio at 23.57%.Current ratio at 3.74. MRQ net profit margin at 17.47% vs. 12.61% y/y. MRQ sales/assets at 0.333 vs. 0.293 y/y. MRQ assets/equity at 1.172 vs. 1.263 y/y.
8. Superior Industries International, Inc. (SUP): Designs, develops, manufactures, sells, and supplies cast aluminum road wheels to automobile and light truck manufacturers primarily in North America. Market cap at $528.57M.Dividend yield at 3.29%, payout ratio at 25.84%.Current ratio at 5.9. MRQ net profit margin at 18.53% vs. 11.65% y/y. MRQ sales/assets at 0.366 vs. 0.334 y/y. MRQ assets/equity at 1.288 vs. 1.384 y/y.
*Accounting data sourced from Google Finance, all other data sourced from Finviz.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.