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"Patience is being friends with time."

Vanna Bonta

Investing in dividend paying stocks has many advantages, some of which are:

  1. Cash flow regardless of market direction.
  2. A steady income without having to sell your position.
  3. Provides one with more financial flexibility.
  4. The option of significantly increasing your rate of return by reinvesting your dividends.
  5. Quicker compounding.
  6. Provides one with the two potential sources of income - one from capital gains and the other from the dividends paid out.
  7. It's a good hedge against inflation.
  8. One has the option of selling covered calls which can in some cases provide a higher stream income than the yearly dividend payment.
  9. If you are bullish on the stock you can open up an additional stream of income by selling puts.

As numerous key ratios will be addressed in this article, it would be in the investor's best interest to get a handle on the more important ones which are listed below. Getting a handle on these ratios could help you come up with your system for spotting potential winners.

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.

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 payout 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 some time. 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 - Chevron Vs. Statoil: Is There A Clear Winner?

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 future earnings. Ideally the company should have a ratio of 1 or higher.

Price to free cash flow is obtained by dividing the share price by free cash flow per share. Higher ratios are associated with more expensive companies and vice versa. Lower ratios are generally more attractive. If a company generated $400 million in cash flow and then spent $100 million on capital expenditures, then its free cash flow is $300 million. If the share price is $100 and the free cash flow per share is $5, then the company trades at 20 times-free cash flow. This ratio is also useful because it can be used as a comparison to the average within the industry. This gives you an idea of how the company you are interested in holds up to the other companies within the industry.

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.

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.

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 a 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. Additional key metrics are addressed in this article - Face-Off: Halliburton Vs. Exxon Mobil.

Company: CF Industries Holdings Inc (NYSE:CF)

Levered Free Cash Flow = 1.85B

Basic Key ratios

  1. Percentage Held by Insiders = 0.42
  2. Number of Institutional Sellers 12 Weeks = 1

Growth

  1. Net Income ($mil) 12/2011 = 1539
  2. Net Income ($mil) 12/2010 = 349
  3. Net Income ($mil) 12/2009 = 366
  4. 12mo Net Income this Q/12mo Net Income 4Q's ago = 340.78
  5. Q Net Income this Q/ same qtr yr ago = 119.12
  1. EBITDA ($mil) 12/2011 = 3209
  2. EBITDA ($mil) 12/2010 = 1304
  3. EBITDA ($mil) 12/2009 = 798
  4. Net Income Rpt Qtr ($mil) = 439
  5. Anl Net Income this Yr/ Net Income last Yr = 340.78
  1. Anl EPS before NRI 12/2007 = 6.39
  2. Anl EPS before NRI 12/2008 = 14.41
  3. Anl EPS before NRI 12/2009 = 7.8
  4. Anl EPS before NRI 12/2010 = 8.62
  5. Anl EPS before NRI 12/2011 = 22.9
  1. Cash Flow ($/share) 12/2011 = 30.85
  2. Cash Flow ($/share) 12/2010 = 13.44
  3. Cash Flow ($/share) 12/2009 = 10
  4. Div 5yr Growth 12/2011 = N/A
  1. Sales ($mil) 12/2011 = 6098
  2. Sales ($mil) 12/2010 = 3965
  3. Sales ($mil) 12/2009 = 2608

Dividend history

  1. Div Yield = 0.9
  2. Div Yield 5 Yr Average 12/2011 = N/A
  3. Div Yield 5 Yr Average 09/2011 = 0.43
  4. Annual Dividend 12/2011 = 1
  5. Annual Dividend 12/2010 = 0.4
  6. Forward Yield = 0.85
  7. Div 5yr Growth 12/2011 = N/A

Dividend sustainability

  1. Payout Ratio 09/2011 = 0.07
  2. Payout Ratio 06/2011 = 0.09
  3. Payout Ratio 5 Yr Average 09/2011 = 0.04
  4. Change in Payout Ratio = 0.03

Performance

  1. Percentage change Price 52 Wks Relative to S&P 500 = 35.2
  2. Standard Dev Target Price Estimate = 21.31
  3. Average EPS Surprise Last 4 Qtr = 11.5
  4. EPS % Change F2/F1 = -5.11
  5. Next 3-5 Yr Estimate EPS Growth rate = 18.67
  6. 5 Yr Historical EPS Growth 09/2011 = 32.54
  7. ROE 5 Yr Average 09/2011 = 29.7
  1. Return on Investment 12/2011 = N/A
  2. Return on Investment 09/2011 = 24.39
  3. Debt/Tot Cap 5 Yr Average 09/2011 = 11.44
  1. Current Ratio 12/2011 = N/A
  2. Current Ratio 09/2011 = 1.74
  3. Current Ratio 06/2011 = 1.37
  4. Current Ratio 5 Yr Average = 2.05
  5. Quick Ratio = 1.45
  6. Cash Ratio = 1.19
  7. Interest Coverage 12/2011 = N/A
  8. Interest Coverage 09/2011 = 25.76
  9. Interest Coverage 06/2011 = 18.15

Notes

  1. It sports a very strong quarterly earnings growth rate of 119% and a good quarterly revenue growth rate of 38.8%.
  2. Net income has surged from $366 million in 2009 to $1.53 billion in 2011 and cash flow per share has exploded from $10 in 2009 to $30.85 in 2011.
  3. Sales have risen from $2.6 billion in 2009 to $6.09 billion in 2011 and it has a very low payout ratio of just 7%.
  4. A five-year historical EPS growth rate of 32% and a good five-year sales growth rate of 20%.
  5. A good interest current and quick ratio of 1.74 and 1.37 respectively and a great interest coverage ratio of 25.7.
  6. It has a strong free cash flow yield of 15.35%.
  7. It repurchased 6.5 million shares of common stock, which represents 9% of the outstanding shares.
  8. $ 100K invested for eight years would have grown to $1.09 million.

Company: Sohu.Com Inc (NASDAQ:SOHU)

Levered Free Cash Flow = 93.06 million

Basic Key ratios

  1. Percentage Held by Insiders = 21.05
  2. Market Cap ($mil) = 2052

Growth

  1. Net Income ($mil) 12/2011 = 163
  2. Net Income ($mil) 12/2010 = 149
  3. Net Income ($mil) 12/2009 = 148
  4. 12months Net Income this Quarterly/12 months Net Income 4Q's ago = 9.5
  5. Quarterly Net Income this Quarterly/same Quarter year ago = -38.93
  1. EBITDA ($mil) 12/2011 = 373
  2. EBITDA ($mil) 12/2010 = 261
  3. EBITDA ($mil) 12/2009 = 228
  4. Net Income Reported Quarterly ($mil) = 27
  5. Annual Net Income this Yr/ Net Income last Yr = 9.5
  1. Cash Flow ($/share) 12/2011 = 7.55
  2. Cash Flow ($/share) 12/2010 = 4.61
  3. Cash Flow ($/share) 12/2009 = 4.32
  1. Sales ($mil) 12/2011 = 852
  2. Sales ($mil) 12/2010 = 613
  3. Sales ($mil) 12/2009 = 515
  1. Annual EPS before NRI 12/2007 = 0.9
  2. Annual EPS before NRI 12/2008 = 3.96
  3. Annual EPS before NRI 12/2009 = 3.57
  4. Annual EPS before NRI 12/2010 = 3.62
  5. Annual EPS before NRI 12/2011 = 4.62

Performance

  1. Percentage Change Price 52 Weeks Relative to S&P 500 = -36.91
  2. Next 3-5 Year Estimate EPS Growth rate = 18.57
  3. EPS Growth Quarterly(1)/Q(-3) = -119.63
  1. ROE 5 Year Average 06/2011 = 24.93
  2. Return on Investment 06/2011 = 16.42
  3. Debt/Total Cap 5 Year Average 06/2011 = 0.22
  1. Current Ratio 06/2011 = 2.93
  2. Current Ratio 5 Year Average = 3.19
  3. Quick Ratio = 2.93
  4. Cash Ratio = 2.67
  5. Interest Coverage Quarterly = N/A

Notes

  1. It has a good 5 year ROE average of 24.93% and a five year sales growth rate of 44.79%.
  2. Sales have increased by 65% from $515 million in 2009 to $852 million in 2011.
  3. It has a good free cash flow yield of 9.62%.
  4. Projected EPS growth rate for the next 3-5 years is 18.57% and a very good Debt/Total Cap 5 Year Average of 0.22.
  5. Insiders have a decent-sized stake in the company; percentage held by insiders is 21.05%.
  6. A good quick and current ratio of 2.93 and 2.93 respectively and an excellent cash ratio of 2.67.
  7. $100K invested for 10 years would have grown to $4.16 million.

Federal Realty Investment Trust (NYSE:FRT)

Free Cash Flow: $199 million

Growth

  1. Net income for the past three years
  2. Net Income ($mil) 2009 = $98
  3. Net Income ($mil) 2010 = $123
  4. Net Income ($mil) 2011 = $144
  1. Total cash flow from operating activities
  2. 2009 = $256.77 million
  3. 2010 = $256.74 million
  4. 2011 = $244.72 million
  1. Cash And Cash Equivalents for the past three years
  2. 2009= $135.3 million
  3. 2010= $15.7 million
  4. 2011= $67.8 million

Performance

  1. Key Ratios
  2. Price to Sales = 11.13
  3. Price to Book = 5.09
  4. Price to Tangible Book = 5.09
  5. Price to Cash Flow = 41.20
  6. Price to Free Cash Flow = 403
  1. LT Debt to Equity = 1.75
  2. Total Debt to Equity = 0.87
  3. Interest Coverage = 2.24
  4. Asset Turnover = 0.15
  1. ROE = 10.50%
  2. Return on Assets = 4.2%
  3. Quarterly Earnings Growth = -5.8%

Dividend history and sustainability

  1. Dividend yield = 2.9%
  2. Dividend yield 5 year average = 3.54%
  3. Payout ratio = 0.69
  4. Dividend growth rate 3 year average = 2.8%
  5. Dividend growth rate 5 year average = 3.7%
  6. Consecutive dividend increases = 44 years

Notes

Net income increased from $98 million in 2009 to $144 million in 2011.

It is a true dividend king for it has raised its dividend consecutively for 44 years.

Revenue is projected to increase from $545 million in 2010 to $602 million in 2013.

Funds from operations per share are projected to increase from $3.88 in 2010 to $4.46 in 2013.

100K invested in FRT for 10 years has grown to 4202K.

Company: Acacia Res-Tech (NASDAQ:ACTG)

Levered Free Cash Flow = 40.58M

Basic Key ratios

Percentage Held by Insiders = 4.7

Market Cap ($mil) = 1639

Number of Institutional Sellers 12 Weeks = 8

Growth

Net Income ($mil) 12/2011 = 21

Net Income ($mil) 12/2010 = 34

Net Income ($mil) 12/2009 = -11

12mo Net Income this Q/ 12mo Net Income 4Q's ago = -41.34

Q Net Income this Q/ same qtr yr ago = -33.32

EBITDA ($mil) 12/2011 = 40

EBITDA ($mil) 12/2010 = 46

EBITDA ($mil) 12/2009 = -1

Net Income Rpt Qtr ($mil) = -7

Anl Net Income this Yr/Net Income last Yr = -38.03

Cash Flow ($/share) 12/2011 = 1.24

Cash Flow ($/share) 12/2010 = 1.23

Cash Flow ($/share) 12/2009 = -0.1

Sales ($mil) 12/2011 = 172

Sales ($mil) 12/2010 = 132

Sales ($mil) 12/2009 = 67

Anl EPS before NRI 12/2007 = -0.26

Anl EPS before NRI 12/2008 = -0.44

Anl EPS before NRI 12/2009 = -0.26

Anl EPS before NRI 12/2010 = 1.03

Anl EPS before NRI 12/2011 = 1.05

Performance

Percentage change Price 52 Wks Relative to S&P 500 = 11.03

Average EPS Surprise Last 4 Qtr = 271.34

EPS % Change F2/F1 = 20.49

EPS Growth Q(1)/Q(-3) = -168.75

ROE 5 Yr Average 09/2011 = -0.5

Return on Investment 09/2011 = 9.41

Return on Investment 06/2011 = 9.99

Debt/Tot Cap 5 Yr Average 09/2011 = 0

Current Ratio 09/2011 = 10.79

Current Ratio 5 Yr Average = 6.24

Quick Ratio = 10.79

Cash Ratio = 10.69

Interest Coverage = 2.35

Notes

  1. It has a very good quarterly revenue growth rate of 58%.
  2. It sports an incredibly strong current and quick ratio of 10.79 and 110.79 respectively.
  3. Net income has increased from $-11 million in 2009 to $21 million in 2011.
  4. Revenues for 2011 came in at a record $184.7 million as compared to $131.8 million in 2010 an increase of 38%.
  5. A strong five-year sales growth of 37%.
  6. Sales have almost tripled from $67 million in 2009 to $172 million in 2011.
  7. Revenues came in at $21 million in the 4th quarter 2011 compared to $13.1 million in 2010; an increase of 60%.
  8. 100K invested for nine years would have grown to a whopping $1.5 million.

Company: TransCanada Corp (NYSE:TRP)

Levered Free Cash Flow = -269.70M

Growth

  1. Net Income ($mil) 12/2011 = 1732
  2. Net Income ($mil) 12/2010 = 1235
  3. Net Income ($mil) 12/2009 = 1215
  4. 12months Net Income this Quarterly/12 months Net Income 4Q's ago = 29.42
  5. Quarterly Net Income this Quarterly/same Quarter year ago = 36.06
  1. EBITDA ($mil) 12/2011 = 4862
  2. EBITDA ($mil) 12/2010 = 3768
  3. EBITDA ($mil) 12/2009 = 3748
  4. Net Income Reported Quarterlytr ($mil) = 390
  5. Annual Net Income this Yr/ Net Income last Yr = 40.19
  6. Cash Flow ($/share) 12/2011 = 4.48
  7. Cash Flow ($/share) 12/2010 = 3.87
  8. Cash Flow ($/share) 12/2009 = 3.61
  1. Sales ($mil) 12/2011 = 9161
  2. Sales ($mil) 12/2010 = 8166
  3. Sales ($mil) 12/2009 = 8496
  1. Annual EPS before NRI 12/2007 = 1.96
  2. Annual EPS before NRI 12/2008 = 2.11
  3. Annual EPS before NRI 12/2009 = 1.92
  4. Annual EPS before NRI 12/2010 = 1.93
  5. Annual EPS before NRI 12/2011 = 2.22

Dividend history

  1. Dividend Yield = 4.10
  2. Dividend Yield 5 Year Average 12/2011 = 4.09
  3. Dividend Yield 5 Year Average 09/2011 = 4.09
  4. Annual Dividend 12/2011 = 1.72
  5. Annual Dividend 12/2010 = 1.53
  6. Forward Yield = 4.08
  7. Dividend 5 year Growth 12/2011 = 7.16

Dividend sustainability

  1. Payout Ratio 06/2011 = 0.74
  2. Payout Ratio 5 Year Average 12/2011 = 0.73
  3. Payout Ratio 5 Year Average 09/2011 = 0.73
  4. Payout Ratio 5 Year Average 06/2011 = 0.72
  5. Change in Payout Ratio = 0.01

Performance

  1. Percentage Change Price 52 Weeks Relative to S&P 500 = -0.79
  2. EPS Growth Quarterly(1)/Q(-3) = 115.87
  3. ROE 5 Year Average 12/2011 = 10.17
  4. ROE 5 Year Average 09/2011 = 10.17
  5. ROE 5 Year Average 06/2011 = 10.29
  6. Return on Investment 06/2011 = 4.33
  7. Debt/Total Cap 5 Year Average 12/2011 = 54.76
  1. Current Ratio 06/2011 = 0.62
  2. Current Ratio 5 Year Average = 0.72
  3. Quick Ratio = 0.55
  4. Cash Ratio = 0.33
  5. Interest Coverage Quarterly = 3.47

Notes

  1. It has a decent five-year sales growth for a mature company of 4.5%.
  2. Net income has increased from $1.2 billion in 2009 to $1.7 billion in 2011.
  3. It has strong quarterly earnings growth rate of 37% and a good quarterly revenue growth rate of 14.7%.
  4. It has an operating margin of 35.24% and a manageable payout ratio of 74%.
  5. A good five-year dividend growth rate of 7.16% and it has been paying dividends since 1964.
  6. It has consecutively increased dividends for eight years.
  7. $100k Invested for 10 years would have grown to $372K.

Conclusion

Investors should wait for the market to let out some more steam before committing large amounts of money to this market as they are still rather overbought. A pullback in the 7%-12% from the peak would qualify as a strong pullback. In the meantime, long-term investors can either sell covered calls, or if you are bullish on the stock naked puts to open up additional streams of income.

Disclaimer

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: 5 Good Dividend Candidates For Investors To Consider

Additional disclosure: EPS, Price, EPS surprise charts obtained from zacks.com. A major portion of the historical data used in this article was obtained from zacks.com.