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The Magic Formula was used to pick dividend-paying stocks without detracting from 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 November, 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 one. 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 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 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

ACN

Accenture

Information Technology

2.39%

33.9%

ADI

Analog Devices

Semiconductor

3.01%

50.1%

AMAT

Applied Materials

Semiconductor Equipment

3.33%

40.1%

BA

Boeing

Aerospace/Defense

2.51%

30.6%

BLC

Belo

Broadcasting - TV

4.28%

28.7%

CA

CA Technologies

Application Software

4.35%

40.3%

CAH

Cardinal Health

Drugs Wholesale

2.31%

27.7%

COH

Coach

Apparel Footwear & Accessories

2.11%

28.7%

CSCO

Cisco Systems

Networking & Communication

3.23%

18.7%

DELL

Dell

Personal Computers

3.50%

0.0%

DMRC

Digimarc

Information Technology Services

2.14%

10.2%

DOV

Dover

Diversified Machinery

2.39%

27.6%

EMR

Emerson Electric

Industrial Equipment

3.21%

47.1%

GD

General Dynamics

Aerospace/Defense

2.96%

29.6%

GME

GameStop

Electronics Stores

4.20%

12.6%

HLF

Herbalife

Drug Related Products

2.45%

25.7%

INTC

Intel

Semiconductor - Broad Line

4.08%

36.0%

KLAC

KLA-Tencor

Semiconductor Equipment

3.34%

34.6%

KRO

Kronos Worldwide

Specialty Chemicals

4.51%

18.7%

LMT

Lockheed Martin

Aerospace/Defense

4.91%

58.8%

LXK

Lexmark International

Computer Based Systems

5.61%

46.0%

MANT

ManTech International

Security Software & Services

3.28%

26.9%

MDT

Medtronic

Medical Equipment

2.48%

29.6%

MRVL

Marvell Technology Group

Semiconductor

3.01%

14.5%

MSFT

Microsoft

Application Software

3.12%

44.4%

NSU

Nevsun Resources

Gold

2.13%

11.1%

OMC

Omnicom Group

Advertising Agencies

2.49%

32.7%

PDLI

PDL BioPharma

Biotechnology

7.93%

52.8%

PH

Parker Hannifin

Industrial Equipment

2.06%

21.7%

QCOR

Questcor Pharmaceuticals

Biotechnology

3.36%

7.0%

ROK

Rockwell Automation

Industrial Electrical Equipment

2.49%

33.4%

RTN

Raytheon

Aerospace/Defense

3.51%

32.7%

STRA

Strayer Education

Education & Training Services

6.92%

55.5%

STX

Seagate Technology

Data Storage Devices

4.57%

12.8%

SWK

Stanley Black & Decker

Machine Tools & Accessories

2.81%

49.2%

TWX

Time Warner

Entertainment - Diversified

2.40%

38.3%

TYC

Tyco International

Security & Protection Services

2.16%

35.9%

USMO

USA Mobility

Wireless Communications

4.53%

48.6%

VIAB

Viacom

CATV Systems

2.16%

24.6%

XLS

Exelis

Communication Equipment

3.76%

18.1%

Mean

3.40%

30.9%

Moreover, these stocks are reasonably priced:

Ticker

Company

P/E

P/S

P/B

ACN

Accenture

18.01

1.58

10.42

ADI

Analog Devices

18.61

4.37

2.95

AMAT

Applied Materials

13.02

1.45

1.61

BA

Boeing

12.35

0.67

6.96

BLC

Belo

9.34

1.05

2.6

CA

CA Technologies

11.6

2.27

2.02

CAH

Cardinal Health

13.43

0.13

2.26

COH

Coach

15.96

3.32

8.12

CSCO

Cisco Systems

11.64

2

1.79

DELL

Dell

5.41

0.26

1.63

DMRC

Digimarc

19

3.33

2.86

DOV

Dover

12.65

1.24

2.02

EMR

Emerson Electric

15.19

1.49

3.5

GD

General Dynamics

10.24

0.75

1.7

GME

GameStop

10.13

0.32

1.06

HLF

Herbalife

13.15

1.45

20.21

INTC

Intel

9.63

2.05

2.24

KLAC

KLA-Tencor

11.63

2.58

2.38

KRO

Kronos Worldwide

4.13

0.74

1.46

LMT

Lockheed Martin

10.7

0.64

12.35

LXK

Lexmark International

9.18

0.39

1.16

MANT

ManTech International

8.19

0.35

0.84

MDT

Medtronic

12.77

2.64

2.48

MRVL

Marvell Technology Group

10.36

1.35

0.93

MSFT

Microsoft

15.95

3.43

3.61

NSU

Nevsun Resources

5.21

1.43

1.65

OMC

Omnicom Group

14.01

0.9

3.79

PDLI

PDL BioPharma

5.69

2.94

PH

Parker Hannifin

11.19

0.9

2.31

QCOR

Questcor Pharmaceuticals

9.12

3.28

11.39

ROK

Rockwell Automation

14.66

1.71

5.54

RTN

Raytheon

9.78

0.77

2.09

STRA

Strayer Education

7.78

1.17

9.92

STX

Seagate Technology

4.34

0.74

3.17

SWK

Stanley Black & Decker

20.43

1.07

1.63

TWX

Time Warner

16.94

1.42

1.4

TYC

Tyco International

9.97

0.72

0.89

USMO

USA Mobility

5.38

1.05

0.94

VIAB

Viacom

12.34

1.8

3.52

XLS

Exelis

6.43

0.35

1.94

Mean

11.39

1.50

3.83

Median

11.40

1.30

2.26

Repurposing the Magic Formula for dividend investing created a compelling portfolio. Its median holding price-to-earnings ratio of 11.40, and a price-to-sales ratio of 1.30. 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.


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.

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.

Source: Magic Formula Dividends