We all know that change is constant in life, and one way to prepare for the unknown is to have a strong portfolio. Investing in dividends that offer yields of 3% or greater is one method for building wealth. To find companies that offer yields of this nature we searched specifically for two traits: profitability and liquidity. When a company has both characteristics they demonstrate they have what it takes to run efficiently while maintaining a cash reserve to fund strategies for growth and weather economic lulls. We came up with a short list of profitable and liquid companies offering moderate dividend yields. Take a look at the list below to begin your own investigation.
Return on Assets [ROA] illustrates how much a company is generating in earnings from its assets alone. This metric gives investors a picture of how profitable the company is relative to the assets in current possession. As well, it lets investors see how efficient and effective management is at generating earnings from the company's assets. While most management teams can probably make money by throwing money at an issue very few can make very large profits with little investment.
The Operating Profit Margin is a profitability ratio that measures the effectiveness of the company's operating efficiency. This metric allows investors to see how much profit is left after all variable costs are covered. If the company's margin is increasing over time this means that it's earning more per dollar of sales. Finding trends in the Operating Profit Margin helps investors identify companies that are improving profitability over time and managing the economic landscape better than competitors.
The Current ratio is a liquidity ratio used to determine a company's financial health. The metric illustrates how easily a firm can pay back its short obligations all at once through current assets. A company that has a current ratio of one or less is generally a liquidity red flag. Now this doesn't mean the company will go bankrupt tomorrow, but it also doesn't bode well for the company, and may indicate that it could have an issue paying back upcoming obligations.
The Quick ratio measures a company's ability to use its cash or assets to extinguish its current liabilities immediately. Quick assets include assets that presumably can be converted to cash at close to their book values. A company with a Quick Ratio of less than 1 cannot currently pay back its current liabilities. The quick ratio is more conservative than the Current Ratio because it excludes inventory from current assets, since some companies have difficulty turning their inventory into cash. If short-term obligations need to be paid off immediately, sometimes the current ratio would overestimate a company's short-term financial strength. In general, the higher the ratio, the greater the company's liquidity (i.e., the better able to meet current obligations using liquid assets).
We first looked for dividend stocks. Next, we then screened for businesses that have strong profitability relative to their asset base (ROA [TTM]>10%)(1-year operating margin>15%). Next, we then screened for businesses that have strong liquidity (Current Ratio>2)(Quick Ratio>2). We did not screen out any market caps or sectors.
Do you think these stocks will go up in valuation? Use our screened list as a starting point for your own analysis.
1) Linear Technology Corp. (LLTC)
Linear Technology Corporation, together with its subsidiaries, designs, manufactures, and markets various analog integrated circuits worldwide. The company produces power management, data conversion, signal conditioning, RF and interface ICs, and Module subsystems. Its products comprise amplifiers, high speed amplifiers, voltage regulators, voltage references, interface, data converters, radio frequency circuits, power over Ethernet controllers, Module power products, and single chain Module products, as well as other liner circuits. The company's product applications include telecommunications, cellular telephones, networking products, tablet, notebook, and desktop computers; computer peripherals, video/multimedia, industrial instrumentation, and security monitoring devices; consumer products, such as digital cameras and global positioning systems; complex medical devices, automotive electronics, factory automation, and process control; and military, space, and other harsh environment systems.
2) Quality Systems Inc. (QSII)
Quality Systems, Inc., together with its subsidiaries, engages in the development and marketing of healthcare information systems in the United States. The company operates in four divisions: QSI Dental, NextGen, Hospital Solutions, and Revenue Cycle Management (RCM) Services. The QSI Dental division develops, markets, and supports software suites for dental organizations.
3) Garmin Ltd. (GRMN)
|Industry||& Scientific TechnicalInstruments|
Garmin Ltd., together with its subsidiaries, designs, develops, manufactures, and markets global positioning system (GPS) enabled products and other navigation, communication, and information products for the automotive/mobile, outdoor, fitness, marine, and general aviation markets worldwide. The company offers a range of automotive navigation products, and various products and applications designed for the mobile GPS market; GPS enabled handheld products for hunters, hikers, geocachers, outdoors enthusiasts, cyclists, and golfers; dog tracking systems; tracker systems; and training assistants for athletes. It also provides handhelds, network products and multifunction displays, fixed-mount GPS/chartplotter products, instruments, fish finders, radars, autopilots, VHF radios, marine networking products, and sounder products.
*Company profiles were sourced from Google Finance and Yahoo Finance. Financial data was sourced from Finviz on 08/20/2012.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.