In this Motley Fool series, we rank three related stocks on five criteria to determine the best buy.

I recently bumped Altria (NYSE: MO), ADP (Nasdaq: ADP), and Annaly Capital (NYSE: NLY) up against each other (click here to see that article) to determine which was the best dividend stock.

If you follow those three companies, then today's matchup should interest you. We'll determine which of these three is the best dividend play: Philip Morris International (NYSE: PM), Paychex (Nasdaq: PAYX), or Chimera (NYSE: CIM).

A little background first:

  • Philip Morris International and Altria are sister companies. Altria is the tobacco company behind Marlboro in the U.S., and as you'd guess from the name, Philip Morris International covers the rest of the globe. Each has a nice dividend -- 6.3% for Altria and 4.5% for Philip Morris. The big difference between the two is that Altria dominates a mature market with declining cigarette volumes while Philip Morris has some larger growth opportunities. Many investors who buy one buy them both (include me in that group).
  • The other two pairs are related companies, but ADP and Paychex compete with each other in the payroll processing space. However, ADP is the larger company and tends to go after the larger clients. Paychex goes after the small and medium-sized businesses. ADP's debt is rated AAA and pays out a 3.2% dividend yield. Paychex isn't one of the handful in the AAA-rated club, but it pumps out a 4.6% dividend yield.
  • Annaly Capital is kind of the puppetmaster of Chimera as well as Crexus (NYSE: CXS). All three are REITs that make money trading securities using cheap debt financing -- pocketing the spread between what they buy and what they borrow. Annaly is the investment manager of the other two and owns a piece of each. In fact, Chimera and Crexus have no employees -- they rely on Annaly's. The difference between the three is what they invest in: Annaly is mostly in agency mortgage-backed securities, Chimera trades mostly in mortgage-backed securities that don't have agency guarantees, and Crexus trades in commercial securities. Their dividend yields are 15.2%, 17.8%, and 4%, respectively.

The biggest dividend yield does not the best dividend play make. No, we care about the sustainability of that dividend and the prospects of the company as a whole. Using five short-of-scientific-but-carefully chosen criteria, let's determine which of these dividend plays -- Philip Morris International, Paychex, or Chimera -- is the best buy.

Round 1: Balance sheet
It's not surprising that the company that gets to earn short-term interest off its client's soon-to-be-processed payroll checks (i.e., float) wins this one; Paychex has a net cash position (i.e., more cash than debt). Philip Morris International has a goodly amount of debt (debt to equity of almost 4:1) but its interest coverage has been very strong. Given its business model, Chimera is quite chaste with its leverage (less than 2:1 debt to equity), but it necessarily deals with opaque securities. Rank: 1) Paychex 2) Philip Morris International 3) Chimera  

Round 2: Operations
The operations at all three of these companies have been impressive of late. Check out their operating margins: Philip Morris is at 40.7%, Paychex is at 36.2%, and Chimera is at a whopping 92.4%. While Philip Morris and Paychex have been pretty consistent over time, Chimera's only been around for a couple years now and it had a rough go of it initially (when you're dealing in mortgage-backed securities, that's expected during a housing collapse). Rank: 1) Philip Morris International, 2) Paychex, 3) Chimera

Round 3: Safest bet
The other two can't beat Paychex for safety. Outside of massive unemployment, its business model is in good shape. Philip Morris is dinged by litigation risk and the fact that it gets almost half its sales from a troubled European Union. Chimera is like a riskier version of Annaly, but don't worry, Chimera fans, it'll have its due in the next section. Rank: 1) Paychex, 2) Philip Morris International, 3) Chimera

Round 4: Sexiest bet
Alright, here we go, Chimera. To an investor, there are few things sexier than a dividend yield creeping on 20%. Maybe a scantily clad Warren Buffett reading a 10-K while running Baywatch style along the beach. But little else. These interest rate spreads that have Chimera humming won't last forever, but it's fun while it does. Payroll processing? Not so much. Rank: 1) Chimera, 2) Philip Morris International, 3) Paychex

Round 5: CAPS rating
Our CAPS community approves of all three of these companies. They rate Chimera and Paychex four stars (out of five). Philip Morris has garnered five-star status. Rank: 1) Philip Morris International, 2) (Tie) Chimera and Paychex

The summary rankings

Category

Philip Morris International

Paychex

Chimera

Balance Sheet

2

1

3

Operations

1

2

3

Safest bet

2

1

3

Sexiest bet

2

3

1

CAPS Rating

1

2

2

Average Finish

1.6

1.8

2.4

Philip Morris International avenges Altria's loss to ADP in this one. However, I believe that all three of these companies deserve a second look. They're three very different companies, so perhaps one of them fit what you're looking for in terms of industry, risk, and yield. In fact, I have every company mentioned in this article on my watchlist and own shares of Philip Morris International and Altria.

But what do you think? Declare your winner in the poll below, and then share your thoughts in the comments box below the poll.

Anand Chokkavelu owns shares of Altria and Philip Morris International. Paychex is a Motley Fool Inside Value selection. Philip Morris International is a Motley Fool Global Gains pick. Automatic Data Processing and Paychex are Motley Fool Income Investor recommendations. The Fool has a disclosure policy.