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 October 2012.
This strategy is designed for income investors who are concerned that dividend-yielding stocks are becoming too pricey. It combines a screen for dividend income with Greenblatt's screen for the best stocks trading at the cheapest values.
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 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 $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 1.63%) 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.
These firms hail from many different industries and have an average dividend yield that is about twice the 10-year treasury yield:
Ticker | Company | Industry | Div Yield | Payout Ratio |
Boeing | Aerospace/Defense | 2.51% | 29.7% | |
CA Technologies | Application Software | 3.93% | 30.5% | |
Caterpillar | Conglomerates | 2.43% | 20.2% | |
Colgate-Palmolive | Personal Products | 2.30% | 46.1% | |
Comcast | CATV Systems | 1.84% | 30.5% | |
ConocoPhillips | Major Integrated Oil & Gas | 4.60% | 49.7% | |
Cisco Systems | Networking & Communication | 2.94% | 18.7% | |
Chevron | Major Integrated Oil & Gas | 3.07% | 24.5% | |
Deluxe | Business Services | 3.24% | 31.4% | |
General Dynamics | Aerospace/Defense | 3.03% | 28.3% | |
GameStop | Electronics Stores | 4.71% | 12.6% | |
The Home Depot | Home Improvement Stores | 1.92% | 40.0% | |
Intel | Semiconductor - Broad Line | 3.95% | 34.1% | |
j2 Global | Internet Software & Services | 2.68% | 34.4% | |
Kraft Foods | Food - Major Diversified | 2.73% | 57.2% | |
KLA-Tencor | Semiconductor Supplies | 3.38% | 30.9% | |
The Coca-Cola Company | Beverages - Soft Drinks | 2.66% | 50.8% | |
Kronos Worldwide | Specialty Chemicals | 4.06% | 18.7% | |
Eli Lilly & | Drug Manufacturers - Major | 4.12% | 56.4% | |
ManTech International | Security Software & Services | 3.50% | 26.9% | |
McDonald's | Restaurants | 3.35% | 50.3% | |
3M | Conglomerates | 2.53% | 36.7% | |
Microsoft | Application Software | 3.12% | 39.6% | |
Nevsun Resources Ltd. | Gold | 2.14% | 11.1% | |
Nu Skin Enterprises | Personal Products | 1.98% | 21.9% | |
Occidental Petroleum | Major Integrated Oil & Gas | 2.50% | 25.8% | |
PDL BioPharma | Biotechnology | 7.63% | 52.8% | |
Pepsico | Beverages - Soft Drinks | 3.04% | 54.1% | |
Quality Systems | Healthcare Information Services | 3.91% | 57.3% | |
Raytheon | Aerospace/Defense | 3.60% | 31.9% | |
Strayer Education | Education & Training Services | 6.03% | 55.5% | |
Seagate Technology PLC | Data Storage Devices | 4.25% | 12.8% | |
Union Pacific | Railroads | 2.02% | 29.2% | |
United Parcel Service | Air Delivery & Freight Services | 3.17% | 54.8% | |
USA Mobility | Wireless Communications | 4.16% | 48.6% | |
United Technologies | Conglomerates | 2.73% | 31.0% | |
Viacom | CATV Systems | 2.05% | 24.6% | |
Wal-Mart Stores | Discount, Variety Stores | 2.15% | 31.9% | |
Exelis | Communication Equipment | 3.93% | 18.1% | |
Exxon Mobil | Major Integrated Oil & Gas | 2.48% | 20.9% | |
Average | 3.26% | 34.5% |
Moreover, these stocks are reasonably priced:
Ticker | Company | P/E | P/S | P/B |
BA | Boeing | 12.13 | 0.69 | 9.07 |
CA | CA Technologies | 12.98 | 2.49 | 2.17 |
CAT | Caterpillar | 9.56 | 0.84 | 3.51 |
CL | Colgate-Palmolive | 21.38 | 3.01 | 22.22 |
CMCSA | Comcast | 20.33 | 1.59 | 1.98 |
COP | ConocoPhillips | 11.08 | 1.08 | 1.52 |
CSCO | Cisco Systems | 12.78 | 2.19 | 1.97 |
CVX | Chevron | 8.73 | 0.93 | 1.77 |
DLX | Deluxe | 9.77 | 1.06 | 4.35 |
GD | General Dynamics | 9.84 | 0.73 | 1.74 |
GME | GameStop | 9.04 | 0.29 | 0.95 |
HD | The Home Depot | 21.63 | 1.27 | 5.18 |
INTC | Intel | 9.64 | 2.09 | 2.34 |
JCOM | j2 Global | 13.55 | 4.31 | 2.71 |
KRFT | Kraft Foods | 21.05 | 1.39 | 2.08 |
KLAC | KLA-Tencor | 10.63 | 2.48 | 2.38 |
KO | The Coca-Cola Company | 20.31 | 3.64 | 5.36 |
KRO | Kronos Worldwide | 4.59 | 0.82 | 1.62 |
LLY | Eli Lilly & | 13.18 | 2.36 | 3.86 |
MANT | ManTech International | 7.67 | 0.32 | 0.78 |
MCD | McDonald's | 17.29 | 3.38 | 6.61 |
MMM | 3M | 15.24 | 2.18 | 3.93 |
MSFT | Microsoft | 14.74 | 3.35 | 3.73 |
NSU | Nevsun Resources Ltd. | 5.2 | 1.42 | 1.65 |
NUS | Nu Skin Enterprises | 12.82 | 1.23 | 4.3 |
OXY | Occidental Petroleum | 11.13 | 2.89 | 1.77 |
PDLI | PDL BioPharma | 5.91 | 3.06 | |
PEP | Pepsico | 18.59 | 1.65 | 5.38 |
QSII | Quality Systems | 14.66 | 2.37 | 3.47 |
RTN | Raytheon | 9.67 | 0.75 | 2.14 |
STRA | Strayer Education | 8.92 | 1.34 | 11.37 |
STX | Seagate Technology PLC | 4.67 | 0.79 | 3.41 |
UNP | Union Pacific | 15.33 | 2.73 | 2.94 |
UPS | United Parcel Service | 17.82 | 1.28 | 9.05 |
USMO | USA Mobility | 5.86 | 1.14 | 1.03 |
UTX | United Technologies | 13.32 | 1.28 | 3.16 |
VIAB | Viacom | 12.98 | 1.89 | 3.71 |
WMT | Wal-Mart Stores | 15.59 | 0.54 | 3.55 |
XLS | Exelis | 6.15 | 0.34 | 1.85 |
XOM | Exxon Mobil | 9.64 | 0.85 | 2.6 |
Mean | 12.39 | 1.70 | 3.93 | |
Median* | 12.46 | 1.37 | 2.94 |
Repurposing the Magic Formula for dividend investing created a compelling portfolio. It has a median holding price-to-earnings ratio of 12.46, and a price-to-sales ratio of 1.37. This is an attractively valued income portfolio.
*These price multiples should be averaged using a harmonic mean (ratios which are better when they are smaller usually should be averaged using the harmonic mean), but reporting the median value and algebraic mean is more straightforward for a general audience. The harmonic means were 10.41 for the P/E ratio, 1.09 for the P/S ratio, and 2.46 for the (P/B) ratio.
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.
