Content
Content
Stocks
Stocks

The Magic Formula's Top Dividend Stocks

In a down economy, many money managers recommend that investors focus on dividend paying stocks. There are many attractive qualities to owning dividend paying stocks, some of which I've written about before. In a weak market, though, dividend paying stocks can be even more attractive. As stock prices fall, companies that can maintain or increase their dividend payout provide an increasing dividend yield to their stockholders. When you buy into a company that can sustain or even increase a high yield, you are effectively "locked in" to that high yield, which compounds every year, in addition to the likely capital gain of stock price appreciation.

It's important to note, though, that in this economy dividend cuts and eliminations are pretty common as companies get conservative with their cash. What can look like a can't miss opportunity for locking in a high dividend yield can vanish in a hurry when the press release announcing a dividend cut comes across the wire. It's important that investors make sure that the prospective company has a comfortable margin for paying out the dividend before making the investment.

To provide some ideas, I've looked over the Magic Formula screens used here at MagicDiligence (the top 100 stocks over 50 million market cap and the top 50 over 2 billion), looking for companies with solid yields of 3.4% or more and a dividend-to-earnings (payout) ratio of 45% or less. This should provide a list of solid dividend payers with enough margin of error to avoid having to cut the payout. Here are the results:

StockDividend YieldPayout Ratio
Pacer International (PACR)5.70%30.1%
Meredith (MDP)4.70%31.9%
Rockwell Automation (ROK)4.50%27.9%
Emerson Electric (EMR)4.10%39.0%
HerbalLife (HLF)4.00%21.5%
American Eagle Outfitters (AEO)3.90%24.3%
Intel (INTC)3.80%40.7%
Northrup Grumman (NOC)3.60%30.2%
McGraw-Hill Companies (MHP)3.50%33.7%
Boeing (BA)3.40%30.9%
Innophos Holdings (IPHS)3.40%9.9%

All of these companies look attractive on a dividend yield basis, and seem to have some margin of error to maintain their dividend payments. And, of course, since they are Magic Formula stocks, we expect them to be good companies as they generate high returns on invested capital. However, this should be taken as a starting point. The payout ratio is calculated against net earnings, which can occasionally contain one time gains and other non-repeatable factors. Also, you want to be sure that these companies have strong balance sheets and that their high return on capital is sustainable, even through down periods. These are things I examine and report on for MagicDiligence members.

Get our stock reviews and other Magic Formula focused content delivered FREE to your inbox. Sign up for the MagicDiligence Newsletter! For a limited time, you'll also get the FREE report, 5 Quick and Easy Tips for Improving Your Stock Picks!
Get Your FREE Report Now

We will NEVER give out your email address. Period.

Disclosure: Steve owns no stocks referenced here.

Joel Greenblatt and MagicFormulaInvesting.com are not associated in any way with this website. Neither Mr. Greenblatt or MagicFormulaInvesting.com endorse this website's investment opinions, strategy, or products. Investment recommendations on this website are not chosen by Mr. Greenblatt, nor are they based on Mr. Greenblatt's proprietary investment model, and are not chosen by MagicFormulaInvesting.com. Magic Formula® is a registered trademark of MagicFormulaInvesting.com, which has no connection to this website. The information on this website is for informational purposes only and solely represents the views and opinions of the author. No warranty is provided or implied as to the accuracy, completeness, or timeliness of this information. This information may not be construed as investment advice of any kind, nor can it be relied upon as the basis for stock trades. Alexander Online Properties LLC, the proprietor of this website, is not responsible in any way for losses or damages resulting from the use of this information. Alexander Online Properties LLC is not a registered investment advisor. All logos are trademarked properties of their respective companies.

© 2008-2014 Alexander Online Properties LLC