Morningstar's Favorite Dividend Stocks

by: Davy Bui

The 21st century has been unkind to investors thus far, with the major indices registering negative gains since the new millennium. Such dour results should reinforce the major role dividends play in delivering investor returns. Historically, dividends have accounted for nearly half of total returns for stock investors.

This stock screen focuses on dividend stocks, accordingly. Morningstar conveniently provides a "Solid High-Yield Stocks" screen (available to premium subscribers), which is described as follows:

If you're looking for dividends, here's a good list to start with. We look for stocks with dividend yields of at least 3% that haven't cut their dividend in the past five years. We also throw out distressed companies, which are those least likely to maintain their dividend in the future.

The screen resulted in 23 names, of which a few tiny micro caps were discarded for a final list of 19 stocks:

COMPANY Current Price Yield Payout Ratio EV / EBITDA
Auburn National Bancorporation Inc (AUBN.W) $20.45 0.805 (3.83%) ex-div:"Mar 7" 53% N/A
Campbell Soup Co (NYSE:CPB) $32.88 1.16 (3.54%) ex-div:"Dec 22" 50% 8.8
The Clorox Co (NYSE:CLX) $67.99 2.35 (3.45%) ex-div:"Jan 24" 56% 10.5
ConAgra Foods Inc (NYSE:CAG) $26.05 0.94 (3.59%) ex-div:"Jan 27" 50% 7.9
Darden Restaurants Inc (NYSE:DRI) $50.92 1.61 (3.11%) ex-div:"Jan 6" 46% 8.6
Delta Natural Gas Company Inc (DGAS.W) $38.00 1.39 (3.66%) ex-div:"Feb 28" 80% 9.6
First Capital Inc. (NASDAQ:FCAP) $20.95 0.76 (3.63%) ex-div:"Mar 14" 54% N/A
General Mills Inc (NYSE:GIS) $38.85 1.195 (3.10%) ex-div:"Jan 6" 51% 10.5
H.J. Heinz Co (HNZ) $52.77 1.92 (3.63%) ex-div:"Mar 21" 63% 10.6
Laclede Group Inc (LG) $39.00 1.64 (4.23%) ex-div:"Mar 8" 55% 8.1
Meredith Corp (NYSE:MDP) $34.15 1.276 (3.86%) ex-div:"Feb 24" 46% 7.3
New Jersey Resources Corp (NYSE:NJR) $44.60 1.48 (3.34%) ex-div:"Mar 13" 45% 12.1
Piedmont Natural Gas Company Inc (NYSE:PNY) $31.17 1.17 (3.77%) ex-div:"Mar 21" 79% 11.2
Procter & Gamble Co (NYSE:PG) $67.43 2.10 (3.11%) ex-div:"Jan 18" 60% 11.6
RPM International Inc (NYSE:RPM) $25.22 0.85 (3.38%) ex-div:"Jan 11" 56% 9.3
Southside Bancshares Inc (NASDAQ:SBSI) $22.20 0.91 (4.19%) ex-div:"Feb 28" 36% N/A
Sysco Corp (NYSE:SYY) $29.84 1.05 (3.52%) ex-div:"Jan 4" 53% 8.6
TransMontaigne Partners LP (NYSE:TLP) $34.94 2.48 (7.11%) ex-div:"Jan 27" 121% 9.6
UGI Corp (NYSE:UGI) $27.25 1.04 (3.82%) ex-div:"Mar 13" 56% 6.9

Readers can view in-depth financial metrics, including my rough fair value estimate based on cash flow, in spreadsheet format.

As one might expect, stable and consistent dividend payers are valued by the market as every name on the list sells for at least 7x EV/EBITDA. On a free cash flow (FCF) basis, only 1 of the 19 stocks looked cheap -- Meredith Corp. However, the stock registers a 27% short interest, which may indicate some trouble in the company's business model so further research is definitely warranted before considering an investment in MDP. The rest of the list is summarized below.

Auburn National Bancorporation, Inc. is a bank holding company operating in Alabama. Return figures were not available.

Campbell Soup Company manufactures and markets convenience food products in these segments: U.S. Simple Meals; U.S. Beverages; Global Baking and Snacking; International Simple Meals and Beverages, and North America Foodservice. CPB outperforms the industry with 72% ROE (vs peers' 22%) and 17% ROI (vs 15%).

The Clorox Company manufactures and markets consumer and institutional products. The company sells its products, including its namesake bleach/cleaning and Green Works natural cleaning products, primarily through mass merchandisers, grocery stores and other retail outlets. CLX delivered impressive 19% ROI 19.34 vs. 1% industry average.

ConAgra Foods, Inc. is a food company operating in two segments: Consumer Foods and Commercial Foods. The company's brands include Banquet, Chef Boyardee, David Seeds, Egg Beaters, Healthy Choice, Hebrew National, Pam and Snack Pack. Returns lagged the industry with ROE of 16% (vs. peers' 22%) and ROI of 8% (vs. 15%).

Darden Restaurants, Inc. is a full-service restaurant company, operating various concepts like Red Lobster, Olive Garden, LongHorn Steakhouse and others. DRI delivered returns of 25% ROE and 11% ROI vs. peers' 16% and 13%, respectively.

Delta Natural Gas Company, Inc. distributes or transports natural gas to approximately 37,000 customers, primarily in Kentucky. Returns vs. Industry outperformed at 9% ROE and 4% ROI vs. peers' 4% and 2%.

First Capital, Inc. is a holding company of First Federal Bank, A Federal Savings Bank (the Bank). The bank is a member of the Federal Home Loan Bank System. Return figures were not available.

General Mills, Inc. is a global manufacturer and marketer of consumer foods sold through retail stores. The company is also a supplier of branded and unbranded food products to the foodservice and commercial baking industries. While GIS slightly betters the industry on ROE (24% vs 22%), it lags on an ROI basis (10% vs 15%).

H. J. Heinz Company is engaged in manufacturing and marketing a range of food products throughout the world. The company's principal products include ketchup, condiments and sauces, frozen food, soups, beans and pasta meals, infant nutrition and other food products. Like General Mills, HNZ outperformed on ROE (35% vs 22%) but lagged on ROI (12% vs 15%).

The Laclede Group, Inc. provides natural gas service through its regulated core utility operations while engaging in non-regulated activities that provide sustainable growth. LG outperformed the industry with 11% ROE and 4% ROI beating peers' 4% and 2%.

Meredith Corporation is a media and marketing company. The company is engaged in magazine publishing and related brand licensing, television broadcasting, integrated marketing, interactive media, and video production related operations. MDP operates two business segments: national media and local media. While its free cash flow stream looks very attractive, Meredith's return figures slightly trail the industry on both ROE (15% vs 16%) and ROI (9% vs 12%).

New Jersey Resources Corporation is an energy services holding company providing retail and wholesale energy services to customers in states from the Gulf Coast and Mid-Continent regions to the Appalachian and Northeast regions, the West Coast and Canada. Yet another natural gas operator in this screen, NJR delivered 17% ROE (vs peers' 4%) and 6% ROI (vs 2%).

Piedmont Natural Gas Company, Inc. is an energy services company whose business is the distribution of natural gas to residential, commercial, industrial and power generation customers in portions of North Carolina, South Carolina and Tennessee. Like NJR, PNY also beats the industry with returns of 10% ROE and 4% ROI vs. peers' 4% and 2%.

The Procter & Gamble Company focuses on providing consumer packaged goods. Its products are sold in more than 180 countries primarily through mass merchandisers, grocery stores, membership club stores, drug stores, among other outlets. PG is highly profitable, with returns of 16% ROE and 10% ROI, compared with industry averages of 1% ROE and 1% ROI.

RPM International Inc. markets and sells various specialty chemical product lines, including specialty paints, protective coatings, roofing systems, sealants and adhesives. The company's products are marketed under brand names such as Carboline, DAP, EUCO, Fibergrate, among others. RPM slightly trails industry return averages with 16% ROE (vs peers' 19%) and 8% ROI (vs 19%).

Southside Bancshares, Inc. is a bank holding company for Southside Bank, a Texas state bank that offers a range of financial services to individuals, businesses, municipal entities, and non-profit organizations in the communities that it serves. Return figures were not available.

Sysco Corporation is a North American distributor of food and related products primarily to the foodservice or food-away-from-home industry. The company provides products and related services to approximately 400,000 customers. It generated stellar returns of 26% ROE and 15% ROI, handily beating peers' averages of 8% ROE and 6% ROI.

TransMontaigne Partners L.P. is a terminaling and transportation company. The company conducts its operations primarily in the United States along the Gulf Coast, in the Southeast, in Brownsville, Texas, along the Mississippi and Ohio rivers, and in the Midwest. Returns vs. Industry are favorable: 10% ROE vs 5% and 7% ROI vs 1%.

UGI Corporation distributes and markets energy products and related services. Some of its operations include retail distribution of propane and butane and providing natural gas and electric service through regulated local distribution utilities. UGI outperformed the industry: ROE came in at 10% (vs peers' 4%) and ROI of 5% beat 2% average.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in MDP over the next 72 hours.