Investing in companies that regularly raise dividends provides security in an uncertain market and means higher returns ahead. I have searched for very profitable companies that pay rich dividends and that raise their payouts significantly each year. Those stocks would have to show stable financial conditions and generate positive free cash flow.
I have elaborated a screening method, which shows stock candidates following these lines. Nonetheless, the screening method should only serve as a basis for further research.
The screen's formula requires all stocks to comply with all following demands:
1. The stock is included in the Russell 3000 index. Russell Investment explanation:
The Russell 3000 Index measures the performance of the largest 3000 U.S. companies representing approximately 98% of the investable U.S. equity market. The Russell 3000 Index is constructed to provide a comprehensive, unbiased, and stable barometer of the broad market and is completely reconstituted annually to ensure new and growing equities are reflected.
2. Earnings growth estimates for the next 5 years (per annum) is greater than 10%.
3. Price to free cash flow is less than 16 (many investors prefer using free cash flow instead of net income to measure a company's financial performance, because free cash flow is more difficult to manipulate. Free cash flow is the operating cash flow minus capital expenditure).
4. Dividend yield is greater than 2.2%.
5. Annual rate of dividend growth over the past five years is greater than 10%.
6. The forward P/E is less than 15.
After running this screen on October 24, 2012, before the market open, I obtained as results the 4 following stocks:
Ameriprise Financial Inc. (NYSE:AMP)
Ameriprise Financial Inc. provides a range of financial products and services in the United States and internationally.
Ameriprise Financial has a low trailing P/E of 13.35 and a very low forward P/E of 8.67 and a low PEG ratio of 1.16. The price to free cash flow for the trailing 12 months is very low at 8.13 and the average annual earnings growth estimates for the next 5 years is 11.50%. The forward annual dividend yield is quite high at 2.40% and the payout ratio is very low at 0.28. The AMP stock recently has shown upside momentum; the 10-days moving average crossed-over its 20-days simple moving average five days ago (short-term momentum indicator). All these factors make the stock quite attractive.
Evercore Partners Inc. (NYSE:EVR)
Evercore Partners Inc. operates as an independent investment banking advisory firm.
Evercore Partners has a low forward P/E of 14.29 and a low PEG ratio of 1.01. The price to free cash flow for the trailing 12 months is very low at 8.33 and the average annual earnings growth estimates for the next 5 years is very high at 20%. The forward annual dividend yield is very high at 3.10% and the payout ratio is 0.58. Evercore Partners is scheduled to report its third-quarter 2012 financial results today, and the results would probably affect the short-term stock price.
Greif, Inc. (NYSE:GEF)
Greif, Inc. manufactures and sells industrial packaging products, bulk containers, and containerboard and corrugated products worldwide.
Greif has a low forward P/E of 13.09 and a PEG ratio of 1.51. The price to free cash flow for the trailing 12 months is very low at 9.47 and the average annual earnings growth estimates for the next 5 years is 10.75%. The forward annual dividend yield is very high at 3.80% and the payout ratio is 0.62. The company is trading 22.6% below its 52-week high and has 23.8% upside potential based on the consensus mean target price of $53.50 for the company. The GEF stock looks quite attractive.
The Western Union Company (NYSE:WU)
The Western Union Company provides money movement and payment services worldwide.
The Western Union Company has a very low trailing P/E of 9.24 and a very low forward P/E of 9.43. The PEG ratio is also very low at 0.84. The average annual earnings growth estimates for the next 5 years is 11.04%. The forward annual dividend yield is quite high at 2.20% and the payout ratio is very low at 0.24. The company is trading 7.53% below its 52-week high and has 18.6% upside potential based on the consensus mean target price of $21.37 for the company. All these factors make the stock quite attractive.
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.