Investors are on the hunt for yield, and dividend stocks are offering payouts that federal bonds have yet to match or beat. The Wall Street Journal reports that dividend stocks, along with utilities and real-estate investment trusts [REITs], have posted bigger gains than the major indexes so far this year, boosting the Dow Jones Industrial Average, DJI, to record highs. Just last Thursday, the DJIA broke 17,000 for the first time in history.
And that's not the only record being broken. In 2013, S&P 500 [SPX] companies made all-time high dividend payments of $34.99 per share; as of June 30th, on a trailing twelve month [TTM] basis, S&P 500 companies were paying $37.38 a share. Furthermore, 423 of the stocks on the index pay dividends, a sixteen-year high for the index.
If you haven't yet, now may still be a good time to start watching dividend stocks, considering 1078 companies raised their dividends in the first quarter of the year - a new record. According to S&P Dow Jones Indices, this increase, which was 14.2% higher than the first quarter of 2013, was the largest since 1979.
Now that the second quarter is done, we decided to run a screen for dividend stocks, specifically focusing on those that appear to pay reliable dividend income. We began with a group of stocks with upcoming ex-dividend dates over the next two weeks. An ex-dividend date is the date by which investors must own shares of a particular stock in order to be eligible for a dividend payment.
Next, we narrowed down that group to stocks with a dividend yield higher than 2%. We frequently use 2% as a benchmark, but the number is especially fitting in this context, given that the S&P 500 and DJIA have dividend yields of 1.98% and 2.29%, respectively.
And for our final screen, we ran the remaining stocks through the DuPont analysis to find those with signs of encouraging profitability. The DuPont analysis, which was developed by the Dupont Corporation (NYSE:DD) almost 100 years ago, assesses a company's return on equity [ROE] by examining its profit margin, total asset turnover, and financial leverage from the most recent quarter [MRQ].
It lets investors see whether a company's profitability stems from an increase in leverage ratio or an increase in net profit margin and/or asset turnover. The former is viewed as a potentially negative source of growth, while the latter is considered a more positive one.
We looked at ROE because, as Charles Schwab determined in 2009, companies with high ROE are better equipped to continue paying and increase their dividends than those with low ROE. This revelation is particularly useful for income investors, since a company can halt or cut its dividends whenever it sees fit.
1. Saul Centers Inc. (NYSE:BFS): Operates as a real estate investment trust in the United States. Market cap at $1.01B, most recent closing price at $48.94.
The company offers a dividend yield of 3.27%. Its ex-dividend date is Tuesday, July 15th.
MRQ net profit margin at 19.43% vs. 10.12% y/y. MRQ sales/assets at 0.044 vs. 0.041 y/y. MRQ assets/equity at 4.329 vs. 4.528 y/y.
MRQ annualized ROE at 28.83% vs. an industry average of 9.09%. ROE on a TTM basis at 24.76% vs. an industry average of -1.30%.
2. Caterpillar Inc. (NYSE:CAT): Manufactures and sells construction and mining equipment, diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives worldwide. Market cap at $69.48B, most recent closing price at $111.08.
The company offers a dividend yield of 2.52%. Its ex-dividend date is Thursday, July 17th.
MRQ net profit margin at 6.96% vs. 6.66% y/y. MRQ sales/assets at 0.157 vs. 0.149 y/y. MRQ assets/equity at 4.156 vs. 4.856 y/y.
MRQ annualized ROE at 18.16% vs. an industry average of 28.35%. ROE on a TTM basis at 19.94% vs. an industry average of 17.11%.
3. Consolidated Communications Holdings Inc. (NASDAQ:CNSL): Provides telecommunications services to residential and business customers in Illinois, Texas, and Pennsylvania. Market cap at $905.49M, most recent closing price at $22.48.
The company offers a dividend yield of 6.90%. Its ex-dividend date is Friday, July 11th.
MRQ net profit margin at 5.56% vs. 4.47% y/y. MRQ sales/assets at 0.086 vs. 0.086 y/y. MRQ assets/equity at 12.238 vs. 13.998 y/y.
MRQ annualized ROE at 23.51% vs. an industry average of 21.53%. ROE on a TTM basis at 23.28% vs. an industry average of -2.84%.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: Kapitall is a team of analysts. This article was written by Mary-Lynn Cesar, one of our writers. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.