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 |
Accenture | Information Technology | 2.39% | 33.9% | |
Analog Devices | Semiconductor | 3.01% | 50.1% | |
Applied Materials | Semiconductor Equipment | 3.33% | 40.1% | |
Boeing | Aerospace/Defense | 2.51% | 30.6% | |
Belo | Broadcasting - TV | 4.28% | 28.7% | |
CA Technologies | Application Software | 4.35% | 40.3% | |
Cardinal Health | Drugs Wholesale | 2.31% | 27.7% | |
Coach | Apparel Footwear & Accessories | 2.11% | 28.7% | |
Cisco Systems | Networking & Communication | 3.23% | 18.7% | |
Dell | Personal Computers | 3.50% | 0.0% | |
Digimarc | Information Technology Services | 2.14% | 10.2% | |
Dover | Diversified Machinery | 2.39% | 27.6% | |
Emerson Electric | Industrial Equipment | 3.21% | 47.1% | |
General Dynamics | Aerospace/Defense | 2.96% | 29.6% | |
GameStop | Electronics Stores | 4.20% | 12.6% | |
Herbalife | Drug Related Products | 2.45% | 25.7% | |
Intel | Semiconductor - Broad Line | 4.08% | 36.0% | |
KLA-Tencor | Semiconductor Equipment | 3.34% | 34.6% | |
Kronos Worldwide | Specialty Chemicals | 4.51% | 18.7% | |
Lockheed Martin | Aerospace/Defense | 4.91% | 58.8% | |
Lexmark International | Computer Based Systems | 5.61% | 46.0% | |
ManTech International | Security Software & Services | 3.28% | 26.9% | |
Medtronic | Medical Equipment | 2.48% | 29.6% | |
Marvell Technology Group | Semiconductor | 3.01% | 14.5% | |
Microsoft | Application Software | 3.12% | 44.4% | |
Nevsun Resources | Gold | 2.13% | 11.1% | |
Omnicom Group | Advertising Agencies | 2.49% | 32.7% | |
PDL BioPharma | Biotechnology | 7.93% | 52.8% | |
Parker Hannifin | Industrial Equipment | 2.06% | 21.7% | |
Questcor Pharmaceuticals | Biotechnology | 3.36% | 7.0% | |
Rockwell Automation | Industrial Electrical Equipment | 2.49% | 33.4% | |
Raytheon | Aerospace/Defense | 3.51% | 32.7% | |
Strayer Education | Education & Training Services | 6.92% | 55.5% | |
Seagate Technology | Data Storage Devices | 4.57% | 12.8% | |
Stanley Black & Decker | Machine Tools & Accessories | 2.81% | 49.2% | |
Time Warner | Entertainment - Diversified | 2.40% | 38.3% | |
Tyco International | Security & Protection Services | 2.16% | 35.9% | |
USA Mobility | Wireless Communications | 4.53% | 48.6% | |
Viacom | CATV Systems | 2.16% | 24.6% | |
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.
