One of the most important considerations for dividend stocks is their profitability. After all, a company that doesn't make profits will not be able to pay a dividend in the long run.
Keeping this idea in mind, we ran a screen on "dividend champions," or companies that have consistently raised their dividend over the last 25 years. We ran DuPont analysis on these names to find those with strong sources of increasing profitability. DuPont analyzes profitability by breaking up return on equity (net income/equity) into three components:
= (Net Profit/Equity)
= (Net profit/Sales)*(Sales/Assets)*(Assets/Equity)
= (Net Profit margin)*(Asset turnover)*(Leverage ratio)
Because increases in net margin and asset turnover are considered good things, DuPont focuses on companies with these positive characteristics: Increasing ROE along with,
- Decreasing leverage, (i.e. decreasing asset/equity ratio)
- Improving asset use efficiency (i.e. increasing sales/assets ratio) and improving net profit margin (i.e. increasing net income/sales ratio)
Those companies that pass DuPont are seeing positive trends in the sources of their increasing profitability, which adds further weight to the idea that the names are profitable.
Interactive Chart: Press Play to compare changes in market cap over the last two years for the stocks mentioned below. Analyst ratings sourced from Zacks Investment Research.
Do you think these stocks pay reliable dividends? Use this list as a starting point for your own analysis.
1. ABM Industries Inc. (NYSE:ABM): Provides facility services for commercial, industrial, institutional and retail facilities primarily in the United States. Market cap at $1.29B. Price at $23.30. Dividend yield at 2.41%, payout ratio at 42.50%. MRQ net profit margin at 0.99% vs. 0.82% y/y. MRQ sales/assets at 0.569 vs. 0.526 y/y. MRQ assets/equity at 2.343 vs. 2.612 y/y.
2. Nacco Industries Inc. (NYSE:NC): Engages in lift trucks, small appliances, specialty retail and mining businesses primarily in the Americas, Europe and the Asia-Pacific. Market cap at $974.67M. Price at $112.55. Dividend yield at 1.83%, payout ratio at 10.98%. MRQ net profit margin at 5.72% vs. 4.43% y/y. MRQ sales/assets at 0.528 vs. 0.522 y/y. MRQ assets/equity at 3.126 vs. 3.707 y/y.
3. Stepan Company (NYSE:SCL): Engages in the production and sale of specialty and intermediate chemicals to manufacturers in various industries worldwide. Market cap at $947.97M. Price at $85.94. Dividend yield at 1.29%, payout ratio at 15.17%. MRQ net profit margin at 2.97% vs. 2.35% y/y. MRQ sales/assets at 0.493 vs. 0.445 y/y. MRQ assets/equity at 2.246 vs. 2.322 y/y.
*Accounting data sourced from Google Finance, all other data sourced from Finviz. Dividend Champions sourced from DRiP Investing.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.