When trying to pick the best dividend stocks, investors should focus on the stocks' annualized dividend yields, sustainability of the yields, the financial capacity to grow dividends in the future, and the management's commitment to sustain and grow dividends. Several indicators will be particularly important, including the ratio of dividend payouts to earnings and free cash flow, the past and projected growth in earnings per share (EPS), the extent of the company's leverage (debt-to-equity ratio), and the free cash flow yield.
Running a screen based on these variables, whereby the dividend coverage ratio is limited to 50%, long-term EPS growth is positive, long-term dividend growth is above 10%, debt-to-equity ratios hover below 40%, and free cash flow yields rest above 5%, produces several appealing and safe dividend plays. Based on these selection criteria, here we take a closer look at five such stocks:
Accenture (ACN) is a $37 billion global management consulting, IT services, and outsourcing firm headquartered in Ireland, Europe. The company has increased dividends each year since 2006. Its currently dividend yield is 2.4%. It has a low dividend coverage ratio of 36% of earnings and 27% of free cash flow. Accenture's peers McKinsey & Co., The Boston Consulting Group, and Deloitte, are privately held. Competitors International Business Machines (IBM) and Infosys Technologies (INFY) pay dividend yields of 1.8% and 2.0%, respectively. Over the past five years, Accenture's dividend and EPS grew at average rates of 31% and 16.4% per year, respectively. The EPS is forecast to grow 10.3% per year for the next five years. The company has no debt. It is cash rich, as its free cash flow yield stands at 6.4%, compared to 5.3% for its peers. The stock is popular with billionaires Jim Simons and Cliff Asness.
Xilinx Inc. (XLNX) is an $8.3 billion chip maker, a designer and marketer of programmable platforms. The company has increased dividends for 10 consecutive years. Xilinx has raised its dividend payout at an average rate of 15.2% a year over the past five years. The company pays a dividend yield of 2.8%. Its dividend coverage ratio is 45% of earnings and 32% of free cash flow. Peer Altera Corp (ALTR) pays a dividend yield of 1%, while rival Lattice Semiconductor Corporation (LSCC) does not pay dividends. Over the past five years, the company's EPS grew at an average annual rate of 13.8%. Analysts forecast that the company's EPS will expand at the same rate each year for the next five years. Xilinx Inc. has a low debt-to-equity ratio of 33%. Its free cash flow yield is 6.7%, compared to 3.2% for the industry. Billionaire Jim Simons is bullish about this company.
Aflac Inc. (AFL) is a $20 billion supplemental health and life insurance company with most operations in Japan and the United States. It pays a dividend yield of 3.0%. Its dividend coverage ratio is 26% of earnings and 6% of operating cash flow. The company has increased dividends every year for the past 29 years. Competitor Unum Group (UNM) pays a dividend yield of 2.2%, while CNO Financial Group does not pay any dividends. The company increased dividends and EPS at average annual rates of 13.7% and 7.2%, respectively, over the past five years. The EPS is forecast to increase at a rate of 11.1% per year over the next five years. Aflac's debt is low at 29% of equity. Its free cash flow yield is 57%, which compares to the industry's average of 36%. Among fund managers, the stock is popular with John Rogers (Ariel Investments-check its top holdings) and billionaire Jim Simons. We recently took a closer look at Aflac as a potential growth and income play.
CA Technologies (CA) is a $12 billion enterprise IT, management software and solutions company. The stock pays a dividend yield of 3.9% on a dividend coverage ratio of 50% of earnings and 40% of free cash flow. Peers International Business Machines Corporation and Oracle Corporation (ORCL) pay dividend yields of 1.8% and 0.8%, respectively. CA Technologies' dividend and EPS grew at average annual rates of 30% and 54%, respectively, over the past five years. The EPS is forecast to rise 10.3% per year for the next five years. The stock has a low debt-to-equity ratio of 24%. Its free cash flow yield is 8.5%, compared to 7% for the industry on average. David Einhorn and Jim Simons are fans of the company.
Parker Hannifin Corporation (PH) is an $11 billion company that produces and sells motion and fluid control systems and related components. Its dividend is currently yielding 2.2% on a dividend coverage ratio of 23% of earnings and 28% of free cash flow. Its competitors Eaton Corporation (ETN) and Honeywell International Inc. (HON) yield 4.0% and 2.7%, respectively. The company has raised dividends for the past 56 years. Over the past five years, its dividend and EPS grew at average annual rates of 17% and 12.6%, respectively. Analysts forecast that the company's EPS will increase at an average rate of 8.5% per year for the next five years. The company has low debt to equity of 32%. Its free cash flow yield is 8.3%, compared to 2.5% for the industry on average. Fund managers Rick Dillon (Diamond Hill Capital-check out its top holdings) and David Harding (Winton Capital Management-see its fund portfolio) are bullish about the stock.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.