Magic Formula Dividend Stocks For September

The Magic Formula was used to pick dividend paying stocks without detracting from its performance in a prior article. Since the Magic Formula does not seem to suffer from limiting picks to dividend-paying stocks, this screening method was used to create a current list of the best dividend stocks to buy now in September, 2012.

What is the Magic Formula?

Joel Greenblatt has reported enviable annual 30.8% returns for his "Magic Formula" in his book, "The Little Book that Beats the Market." Since publishing his book, his strategy has performed well, though many analysts who have followed the "Magic Formula" have not seen 30.8% annual returns, but have seen outperformance from this strategy. His results are particularly interesting because his picks are not subjective: They are based on a simple ranking of earnings yield (EBIT/EV) and return on capital.

Magic Formula stocks have historically outperformed the market with a total portfolio which is a blend of value and growth with a beta of roughly 1 (1.05). This blended profile of Magic Formula picks lends itself to a do-it-yourself investors as a core holding strategy. Moreover, since many of these picks have dividend yields, they can be used to create an income portfolio.

Screening for Magic Formula Dividend Stocks

The following methods were used to extract appropriate dividend-yielding stocks from Greenblatt's Magic Formula results:

Stocks were selected using the Magic Formula methodology. Each of these stocks is one of a top-50 selection with a $50 million, $2 billion, or $10 billion market capitalization minimums.

Stocks were screened for dividend yield. Of these Magic Formula picks, stocks with no dividend yield or which had a dividend yield less than the 10-year Treasury yield (currently 1.56%) were removed.

Stocks were screened for payout ratio. Only stocks with payout ratios under 60% were retained. Dividend payouts under 60% are considered reasonable and sustainable.

Ticker	Company	Industry	Country	Div Yield	Payout Ratio
PDLI	PDL BioPharma	Biotechnology	USA	8.15%	52.8%
STRA	Strayer Education	Education & Training Services	USA	6.17%	55.5%
GCI	Gannett Co.	Publishing - Newspapers	USA	5.24%	32.6%
GME	GameStop	Electronics Stores	USA	5.24%	12.0%
LMT	Lockheed Martin	Aerospace/Defense Products & Services	USA	4.39%	43.9%
USMO	USA Mobility	Wireless Communications	USA	4.38%	48.6%
LLY	Eli Lilly & Co.	Drug Manufacturers - Major	USA	4.36%	56.4%
STX	Seagate Technology	Data Storage Devices	Ireland	4.00%	12.8%
CA	CA Technologies	Application Software	USA	3.84%	30.5%
MANT	ManTech International	Security Software & Services	USA	3.75%	26.9%
INTC	Intel	Semiconductor - Broad Line	USA	3.62%	34.1%
RTN	Raytheon	Aerospace/Defense - Major Diversified	USA	3.54%	31.9%
DLX	Deluxe	Business Services	USA	3.52%	31.4%
FCX	Freeport-McMoRan Copper & Gold	Copper	USA	3.46%	33.8%
CVX	Chevron	Major Integrated Oil & Gas	USA	3.21%	24.5%
HRS	Harris	Communication Equipment	USA	3.15%	24.9%
KLAC	KLA-Tencor	Semiconductor Equipment & Materials	USA	3.12%	30.9%
GD	General Dynamics	Aerospace/Defense Products & Services	USA	3.11%	28.3%
ADI	Analog Devices	Semiconductor - Integrated Circuits	USA	3.02%	50.1%
JCOM	j2 Global	Internet Software & Services	USA	2.99%	34.4%
SWK	Stanley Black & Decker	Machine Tools & Accessories	USA	2.98%	43.3%
CSCO	Cisco Systems	Networking & Communication Devices	USA	2.94%	18.7%
MPC	Marathon Petroleum	Oil & Gas Refining & Marketing	USA	2.71%	13.5%
UTX	United Technologies	Conglomerates	USA	2.68%	31.0%
ROK	Rockwell Automation	Industrial Electrical Equipment	USA	2.61%	33.4%
MSFT	Microsoft	Application Software	USA	2.60%	39.6%
MDT	Medtronic	Medical Appliances & Equipment	USA	2.56%	29.7%
TWX	Time Warner	Entertainment - Diversified	USA	2.50%	38.3%
HLF	Herbalife	Drug Related Products	Cayman Islands	2.48%	25.7%
NSU	Nevsun Resources	Gold	Canada	2.48%	11.1%
BA	Boeing	Aerospace/Defense Products & Services	USA	2.46%	29.7%
CAH	Cardinal Health	Drugs Wholesale	USA	2.40%	27.7%
MRVL	Marvell Technology Group	Semiconductor - Integrated Circuits	Bermuda	2.36%	14.6%
OMC	Omnicom Group	Advertising Agencies	USA	2.34%	31.6%
IPG	The Interpublic Group of Companies	Advertising Agencies	USA	2.26%	20.5%
VIAB	Viacom	CATV Systems	USA	2.20%	24.6%
ACN	Accenture	Information Technology Services	Ireland	2.19%	35.4%
MSI	Motorola Solutions	Communication Equipment	USA	2.18%	29.9%
CMI	Cummins	Diversified Machinery	USA	2.06%	15.9%
COH	Coach	Textile - Apparel Footwear & Accessories	USA	2.06%	27.0%
PH	Parker Hannifin	Industrial Equipment & Components	USA	2.05%	20.2%
MHP	The McGraw-Hill Companies	Publishing - Books	USA	1.99%	33.6%
BAH	Booz Allen Hamilton	Management Services	USA	1.96%	59.4%
NUS	Nu Skin Enterprises	Personal Products	USA	1.93%	21.9%
DNB	Dun & Bradstreet	Information & Delivery Services	USA	1.88%	26.3%
BKE	Buckle	Apparel Stores	USA	1.76%	24.5%
IBM	International Business Machines	Diversified Computer Systems	USA	1.74%	22.1%
SYK	Stryker	Medical Appliances & Equipment	USA	1.60%	22.4%
	Average			3.05%	30.6%

These firms have an average dividend yield that is almost twice the 10-year treasury yield. Moreover, these stocks are reasonably priced:

Ticker	Company	P/E	P/S	P/B	P/FCF
PDLI	PDL BioPharma	5.53	2.86		8.52
STRA	Strayer Education	8.72	1.31	11.11	23.21
GCI	Gannett Co.	9.03	0.68	1.49	6.55
GME	GameStop	8.12	0.27	0.85
LMT	Lockheed Martin	10.67	0.62	13.42	39.21
USMO	USA Mobility	5.57	1.08	0.98	4.84
LLY	Eli Lilly & Co.	12.44	2.23	3.64	19.54
STX	Seagate Technology	4.96	0.85	3.63	5.64
CA	CA Technologies	13.28	2.55	2.22	12.17
MANT	ManTech International	7.16	0.3	0.73	12.18
INTC	Intel	10.52	2.28	2.55	23.8
RTN	Raytheon	9.83	0.77	2.17	19.53
DLX	Deluxe	8.98	0.98	4	9.78
FCX	Freeport-McMoRan Copper & Gold	10.88	1.86	2.07	67.74
CVX	Chevron	8.35	0.89	1.69	41.08
HRS	Harris	9.9	0.98	2.72	11.11
KLAC	KLA-Tencor	11.53	2.69	2.58	13.14
GD	General Dynamics	9.56	0.71	1.69	10.68
ADI	Analog Devices	18.57	4.36	2.95	33.04
JCOM	j2 Global	12.18	3.87	2.44	12.32
SWK	Stanley Black & Decker	18.07	1.02	1.63	31.22
CSCO	Cisco Systems	12.81	2.22	1.98	11.53
MPC	Marathon Petroleum	7.35	0.22	1.7	13.08
UTX	United Technologies	13.58	1.3	3.22	23.74
ROK	Rockwell Automation	13.99	1.63	5.29	79.65
MSFT	Microsoft	15.41	3.5	3.9	11.27
MDT	Medtronic	12.36	2.57	2.43	13.32
TWX	Time Warner	16.23	1.36	1.34	24.58
HLF	Herbalife	13.01	1.43	20	17.27
NSU	Nevsun Resources	4.48	1.23	1.42	3.78
BA	Boeing	12.37	0.7	9.25	25.42
CAH	Cardinal Health	12.92	0.13	2.17	22.01
MRVL	Marvell Technology Group	13.19	1.73	1.19
OMC	Omnicom Group	15.06	0.97	4.17	11.14
IPG	The Interpublic Group of Companies	11.2	0.66	2.11	17.16
VIAB	Viacom	12.11	1.77	3.46	14.29
ACN	Accenture	15.92	1.44	10.28	16.51
MSI	Motorola Solutions	23.14	1.61	3.55	162.45
CMI	Cummins	9.65	1	3.03	27.6
COH	Coach	16.47	3.48	8.32	21.33
PH	Parker Hannifin	10.75	0.91	2.46	11.16
MHP	The McGraw-Hill Companies	17.84	2.28	8.5	24.79
BAH	Booz Allen Hamilton	7.14	0.42	2.59	23.2
NUS	Nu Skin Enterprises	13.13	1.26	4.4	11.74
DNB	Dun & Bradstreet	14.35	2.11		17.88
BKE	Buckle	13.93	2	5.28
IBM	International Business Machines	14.17	2.1	10.88	18.39
SYK	Stryker	14.59	2.38	2.55	19.47
	Average	11.90	1.57	4.13	23.29

Repurposing the Magic Formula for dividend investing created a compelling portfolio. It has an average price-to-earnings ratio of 11.90, an average price-to-sales ratio of 1.57. This is an attractively valued income portfolio.

Disclaimer: This article was written to provide investor information and education, and should not be construed as investment advice. I have no idea what your individual risk, time-horizon, and tax circumstances are: please seek the personal advice of a financial planner. This article uses third-party data and may contain approximations and errors. Please check estimates and data for yourself before investing.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)