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Investors should not base their decision on yield alone. There are many stocks that offer extremely high yields, but their performance over the years has been anything but spectacular. In some cases, the total rate of return has been negative for the past 3-5 years. One should look at the robustness of the company, the dividend growth rate, the sustainability of the dividend and finally one should take a look at the company's dividend history. Companies with stellar records will do everything possible to avoid cutting the dividend in order to maintain this record. In order to qualify for this the companies had to meet the following requirements.

  1. Net income should be trending upwards for the past 3 years
  2. Cash flow per share should be trending upwards for the past 3 years
  3. 3-5 year projected growth rate of 10% or a dividend yield of 6% or higher
  4. Annual EPS before NRI should be trending upwards for the past 3 years
  5. Sales vs 1 year ago (when applicable) of 30% or higher or consecutively increased the dividend for 25 plus years.

A lot of key ratios will be used in this article and it would be good for investors to get a handle on some of the more important key ratios listed below.

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. Investors looking for other ideas might find this article to be of interest - Did Alcatel-Lucent Score A Coup Over A Key Rival In the core router market.

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 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.

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.

Cash ratio is the ratio of the company's total cash and cash equivalents to its current liabilities. This ratio is used as a measure of a company's liquidity. It allows investors to determine how fast the company would be able to pay its short term debts if push came to shove. Higher numbers are better because it makes it easier for a company to ask for new loans, increase in credit lines, etc.

Retention ratio is the amount of net income that is not paid out as dividends. In other words, it is the money the company retains that can be used to grow the business, etc. It is calculated by subtracting 1 from the dividend ratio.

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.

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.

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.

Free cash flow yield is obtained by dividing free cash flow per share by the current price of each share. Generally lower ratios are associated with an unattractive investment and vice versa. Free cash flow takes into account capital expenditures and other ongoing costs associated with the day to day to functions of the business. In our view free cash flow yield is a better valuation metric then earnings yield because of the above factors.

Company: Atlas Pipeline Partners (NYSE:APL)

Brief Overview

  1. Relative Strength 52 weeks = 59
  2. Cash Flow 5-year Average = 5.3
  3. Profit Margin = 9.6%
  4. 52 week change = 29%
  5. Operating Margin = 10.5%
  6. Quarterly Revenue Growth = -25%
  7. Quarterly Earnings Growth = 914%
  8. Beta = 1.9
  9. Percentage Held by Institutions = 37.5%
  10. Short Percentage of Float = 3.9%
  11. Sales vs 1 year ago = 42%

Growth

  1. Net Income ($mil) 12/2011 = 289
  2. Net Income ($mil) 12/2010 = 276
  3. Net Income ($mil) 12/2009 = 60
  4. Net Income Reported Quarterly ($mil) = 5
  5. EBITDA ($mil) 12/2011 = 409
  6. EBITDA ($mil) 12/2010 = 128
  7. EBITDA ($mil) 12/2009 = 171
  8. Cash Flow ($/share) 12/2011 = 3.01
  9. Cash Flow ($/share) 12/2010 = 0.87
  10. Cash Flow ($/share) 12/2009 = 1.79
  11. Sales ($mil) 12/2011 = 1303
  12. Sales ($mil) 12/2010 = 936
  13. Sales ($mil) 12/2009 = 904
  14. Annual EPS before NRI 12/2007 = 1.76
  15. Annual EPS before NRI 12/2008 = 2.41
  16. Annual EPS before NRI 12/2009 = -0.13
  17. Annual EPS before NRI 12/2010 = -0.65
  18. Annual EPS before NRI 12/2011 = 1.3

Dividend history

  1. Dividend Yield = 6.8
  2. Dividend Yield 5 Year Average 03/2012 = 9.45
  3. Dividend 5 year Growth = - 20.00

Dividend sustainability

  1. Payout Ratio = 2.15
  2. Payout Ratio 5 Year Average 03/2012 = 1.46

Performance

  1. ROE 5 Year Average 03/2012 = 6.91
  2. Debt/Total Cap 5 Year Average 03/2012 = 48.1
  3. Current Ratio = 1.10
  4. Current Ratio 5 Year Average = 0.74
  5. Quick Ratio = 0.77
  6. Interest Coverage = 5 .10

Suggested strategy

A great long term play, but consider waiting for a pullback before jumping. Suggested entry points are in the 31-32 ranges.

Company: CenturyLink Inc (NYSE:CTL)

Basic overview

  1. Sales vs 1 year ago = 118%
  2. Levered Free Cash Flow = $1.56B
  3. 52 week change = 24%
  4. Beta = 0.61
  5. Sales vs 1 quarter ago = 4.7%
  6. Quarterly revenue growth rate = 4.7%
  7. Quarterly earnings growth rate = - 35%
  8. 5 year sales growth rate = 48%
  9. EPS 5 year growth rate = - 21%
  10. Long term debt to equity = 0.97
  11. EPS vs 1 quarter ago = - 27%

Growth

  1. Net Income ($mil) 12/2011 = 573
  2. Net Income ($mil) 12/2010 = 948
  3. Net Income ($mil) 12/2009 = 647
  4. EBITDA ($mil) 12/2011 = 6046
  5. EBITDA ($mil) 12/2010 = 3509
  6. EBITDA ($mil) 12/2009 = 2155
  7. Cash Flow ($/share) 12/2011 = 8.43
  8. Cash Flow ($/share) 12/2010 = 8.12
  9. Cash Flow ($/share) 12/2009 = 5.7
  10. Sales ($mil) 12/2011 = 15351
  11. Sales ($mil) 12/2010 = 7042
  12. Sales ($mil) 12/2009 = 4974
  13. Annual EPS before NRI 12/2007 = 3.16
  14. Annual EPS before NRI 12/2008 = 3.37
  15. Annual EPS before NRI 12/2009 = 3.6
  16. Annual EPS before NRI 12/2010 = 3.39
  17. Annual EPS before NRI 12/2011 = 2.21

Dividend history

  1. Dividend Yield = 6.9
  2. Dividend Yield 5 Year Average = 6.50
  3. Dividend 5 year Growth = 58

Dividend sustainability

  1. Payout Ratio = 3.5
  2. Payout Ratio 5 Year Average = 0.68

Performance

  1. Next 3-5 Year Estimate EPS Growth rate = 4.09
  2. ROE 5 Year Average = 10.29
  3. Return on Investment = 3.26
  4. Debt/Total Cap 5 Year Average = 46.13
  5. Current Ratio = 0.90
  6. Current Ratio 5 Year Average = 0.76
  7. Quick Ratio = 0.60
  8. Cash Ratio = 0.38
  9. Interest Coverage = 1.70

Suggested Strategy

The stock is rather overbought at present. Consider waiting for a pullback to the 39-40 ranges before jumping in. If you have a position consider selling covered calls in the 45-47 ranges. If your shares are called away, you could jump into another dividend stock or sell puts at strikes you would not mind owning the stock. If you are not filled you still get paid for your efforts and this could be viewed as dividend replacement.

Company: Johnson & Johnson (NYSE:JNJ)

Basic Key ratios

  1. Profit margin = 13%
  2. Operating margins = 25.4%
  3. Quarterly earnings growth rate= - 0.7%
  4. Quarterly revenue growth rate = -49.3%
  5. Beta = 0.48
  6. 52 week change = 7%
  7. Short ratio = 15%
  8. Sales vs 1 year ago = 5.6%
  9. 5 year capital spending rate = -18.3%
  10. 5 year sales growth rate = 1.49
  11. Sales vs 1 quarter ago = -0.70

Growth

  1. Net Income ($mil) 12/2011 = 9672
  2. Net Income ($mil) 12/2010 = 13334
  3. Net Income ($mil) 12/2009 = 12266
  4. EBITDA ($mil) 12/2011 = 16090
  5. EBITDA ($mil) 12/2010 = 20341
  6. EBITDA ($mil) 12/2009 = 18980
  7. Cash Flow ($/share) 12/2011 = 6.23
  8. Cash Flow ($/share) 12/2010 = 5.91
  9. Cash Flow ($/share) 12/2009 = 5.68
  10. Sales ($mil) 12/2011 = 65030
  11. Sales ($mil) 12/2010 = 61587
  12. Sales ($mil) 12/2009 = 61897
  13. Annual EPS before NRI 12/2007 = 4.15
  14. Annual EPS before NRI 12/2008 = 4.55
  15. Annual EPS before NRI 12/2009 = 4.63
  16. Annual EPS before NRI 12/2010 = 4.76
  17. Annual EPS before NRI 12/2011 = 5

Dividend history

  1. Dividend Yield = 3.6
  2. Dividend Yield 5 Year Average = 3.10
  3. Dividend 5 year Growth = 7.8

Dividend sustainability

  1. Payout Ratio = 0.74
  2. Payout Ratio 5 Year Average = 0.43

Performance

  1. Next 3-5 Year Estimate EPS Growth rate = 6.57
  2. 5 Year History EPS Growth = 4.38
  3. ROE 5 Year Average = 26.32
  4. Return on Investment = 19.16
  5. Debt/Total Cap 5 Year Average = 14.33
  6. Current Ratio = 1.7
  7. Current Ratio 5 Year Average = 1.94
  8. Quick Ratio = 1.2
  9. Interest Coverage = 20
  10. Consecutive dividend increases = 49 years

Suggested strategy

The short ratio stands at 15%, which makes it a pretty good candidate for a short squeeze. Consider waiting for it to trade down to the 62-63 ranges before jumping in. A better strategy would be to sell slightly in the money puts when it trades down to these ranges. If the shares are assigned to your account, your final price will be well below 62.00.

Company: Baidu Inc (NASDAQ:BIDU)

Basic overview

1. 52 week change = -17%

2. Quarterly revenue growth = 59%

3. Quarterly earnings growth rate = 69%

4. Profit margins = 46%

5. Operating margins = 51%

6. Beta = 1.85

7. Gross margins = 72%

8. Long term debt to equity = 0.11

9. Sales vs 1 year ago = 91%

10. 5 year sales growth rate = 64%

11. 5 year EPS growth rate = 73%

12. Long term debt to equity = 0.11

Growth

  1. Net Income ($mil) 12/2011 = 1026
  2. Net Income ($mil) 12/2010 = 522
  3. Net Income ($mil) 12/2009 = 218
  4. EBITDA ($mil) 12/2010 = 668
  5. EBITDA ($mil) 12/2009 = 293
  6. Cash Flow ($/share) 12/2010 = 2.35
  7. Cash Flow ($/share) 12/2009 = 1.01
  8. Sales ($mil) 12/2011 = 2304
  9. Sales ($mil) 12/2010 = 1202
  10. Sales ($mil) 12/2009 = 652
  11. Annual EPS before NRI 12/2007 = 0.25
  12. Annual EPS before NRI 12/2008 = 0.44
  13. Annual EPS before NRI 12/2009 = 0.63
  14. Annual EPS before NRI 12/2010 = 1.53
  15. Annual EPS before NRI 12/2011 = 3.02

Performance

  1. Next 3-5 Year Estimate EPS Growth rate = 45.35
  2. ROE 5 Year Average = 41.72
  3. Return on Investment = 47.92
  4. Debt/Total Cap 5 Year Average = 3.35
  5. Current Ratio = 4.7
  6. Current Ratio 5 Year Average = 3.43
  7. Quick Ratio = 4.5
  8. Cash Ratio = 3.46

Suggested strategy

This is a great long term growth play. However, as the markets are overbought right now, it would make sense to wait for them to let out some steam. A good point to deploy new funds would be a test of the 95-100 ranges.

EPS and Price vs industry charts obtained from zacks.com. A major portion of the historical data used in this article was obtained from zacks.com. Earnings estimates sourced from dailyfinance.com. Forecast revisions and growth estimates sourced from smartmoney.com.

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: 1 Growth And 3 Dividend Plays For Your Long Term Portfolio

Additional disclosure: This article was prepared for Tactical Investor by one of our analysts. We have not received any compensation for expressing the recommendations in this article. We have no business relationships with any of the companies mentioned in this article.