Looking For Dividend Stocks With Buffett's Criteria
I've praised Warren Buffett in this space before, and for good reason - he has one of the most successful - and longest-running - investment track records in the world.
Better yet, he always manages to keep a level head even when the markets are going haywire. In fact, he has almost always managed to use those times to make masterful moves that yield longer-term profits.
And I would argue that his success is largely based on his ability to relentlessly focus on important fundamental measures of a business' worth … regardless of what others are currently thinking.
Of course, dividends are an area where Warren and I somewhat disagree … or at least where our purposes dictate we differ.
It's not that Buffett doesn't buy dividend-paying companies. In fact, many of his biggest holdings - stocks like Coca-Cola and Procter & Gamble - are among the elite stocks that I like to call "dividend superstars."
(Editor's note: To hear Nilus talk about his favorite dividend superstars right now, just click here.)
Of course, I tend to emphasize dividend payments far more than Buffett does.
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That's why I recently combined some of Buffett's favorite fundamental measures with a couple of dividend metrics to come up with a short list of stocks worth investigating further.
Here's what I came up with …
NAME
SYMBOL
INDUSTRY
P/E
IND. YIELD
ROE
PROFIT MARGIN
UNIVERSAL INSURANCE
UVE
Property & Casualty Ins.
4.3
8.5
64.8
26.0
MESABI TRUST
MSB
Steel
14.6
7.0
1341.6
97.4
TERRA NITROGEN
TNH
Fertilizers & Agricultural Chem.
9.2
7.0
110.7
35.7
UNILENS VISION
UVIC
Health Care Supplies
9.5
5.1
27.1
39.6
CHEROKEE
CHKE
Apparel
18.5
4.7
66.8
42.0
LORILLARD
LO
Tobacco
14.7
4.7
145.1
40.3
TECHNICAL COMMUNICATIONS
TCCO
Communications Equipment
2.4
4.7
28.5
49.8
BRIDGE BANCORP
BDGE
Regional Banks
14.3
4.4
16.1
25.2
EASTERN AMERICAN NAT. GAS
NGT
Oil & Gas Exploration & Prod.
25.0
4.3
48.9
70.1
MICROCHIP TECHNOLOGY
MCHP
Semiconductors
16.2
4.2
21.2
31.0
CTC MEDIA INC
CTCM
Broadcasting
22.7
4.2
20.6
36.1
MERCHANTS BANCSHARES
MBVT
Regional Banks
11.0
4.2
15.4
28.0
PAYCHEX
PAYX
Data Processing
21.2
4.1
35.4
38.0
ARROW FINANCIAL
AROW
Regional Banks
12.5
4.1
15.3
30.4
INTEL
INTC
Semiconductors
10.2
3.7
16.1
36.8
JOHNSON & JOHNSON
JNJ
Pharmaceuticals
13.6
3.3
24.3
27.5
SOUTHSIDE BANCSHARES
SBSI
Regional Banks
9.6
3.3
18.4
28.7
WESTAMERICA
WABC
Regional Banks
15.6
3.0
21.1
46.5
S.Y. BANCORP
SYBT
Regional Banks
13.9
3.0
15.5
26.7
AXIS CAPITAL HOLDINGS
AXS
Property & Casualty Ins.
5.2
2.9
16.9
25.2
STRAYER EDUCATION
STRA
Education Services
14.0
2.9
48.4
34.1
U.S. GLOBAL INVESTORS
GROW
Asset Management
17.8
2.8
32.3
24.3
AUTOMATIC DATA PROCESSING
ADP
Data Processing
21.0
2.7
27.3
20.9
ERIE INDEMNITY
ERIE
Property & Casualty Insurance
26.3
2.7
25.8
20.4
ANALOG DEVICES
ADI
Semiconductors
11.8
2.7
17.9
32.7
MOCON
MOCO
Electronic Equipment
18.7
2.3
15.5
20.5
MICROSOFT
MSFT
Systems Software
10.2
2.3
40.5
40.0
CKX LANDS
CKX
Real Estate Operating Co.
29.0
2.1
18.2
77.8
T. ROWE PRICE
TROW
Asset Management
18.2
2.1
21.2
45.1
RLI
RLI
Property & Casualty Ins.
10.3
1.9
16.0
30.6
BUCKLE
BKE
Apparel Retail
14.9
1.7
29.9
22.6
CASS INFORMATION SYS.
CASS
Data Processing
16.4
1.7
17.2
29.0
OCCIDENTAL PETROLEUM.
OXY
Integrated Oil & Gas
12.8
1.7
20.5
39.7
CBOE HOLDINGS
CBOE
Specialized Finance
20.4
1.7
42.5
37.7
COMPUTER SERVICES
CSVI
Data Processing
18.5
1.6
23.9
24.2
TEXAS INSTRUMENTS
TXN
Semiconductors
13.5
1.6
22.9
32.6
Now, a Brief Explanation of What Particular
Measures I Used to Find These Companies …
I started with four of the same criteria that classic value investors like Benjamin Graham - and his more famous student Warren Buffett - have favored, including:
#1. A healthy return on equity: In plain English, return on equity (ROE) is net income divided by shareholder's equity. It tells you how much profit a company can generate from what shareholders have invested. I opted for a five-year average ROE of 15 percent or better.
#2. Solid profit margins: This is a company's net income divided by net sales. It's a great way to determine how strong a company's pricing power is, and how well it's controlling costs. I screened for profit margins in excess of 20 percent.
#3. Low debt: As the name implies, a company's debt-to-equity ratio tells you how much long-term debt it has. The higher the percentage, the more debt. That's why I looked for stocks that had a total debt to total equity ratio under 20 percent. A few of the companies actually had ratios of zero, indicating no long-term debt at all!
#4. Plus, favorable valuations: There's no point in getting a solid company at too high of a price. While there are lots of ways to gauge a stock's valuation, the simplest method is using price-to-earnings ratios. Any company with a P/E over 30 was automatically ruled out in my search.
Then, I limited the results to companies that currently pay dividends worth at least 1.5 percent annually. Any company with a payout ratio above 70 percent was automatically eliminated … which ensured that the dividend was at least somewhat sustainable going forward.
Obviously, I'm not saying Buffett himself is considering investing in any of these companies. But I do think there are plenty of interesting opportunities to be found in this list … and I encourage you to do a little more digging on your own!
Best wishes,
Nilus
P.S. After some more investigating of my own, I did just recommend one of the companies above to my Income Superstars subscribers. If you'd like to learn which stock it was - and get the details on 16 more dividend superstars that I like right now - just click here to watch my latest presentation.
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