With the market almost doubling since the lows of March 2009, the easy money has been made. As stocks have extended their gains, the markets have become a little choppy. The best tonic for a market that looks stretched is value stocks that pay dividends. While you wait for catalysts to pan out, you can sit on these stocks and get paid.
The initial criteria I used for my screen were:
- Return on assets of 1% or more (to eliminate inefficient financials).
- Dividend yield of 3% or higher.
- Debt to equity ratio of 50% or less. We don't want high-risk debt-laden companies with dividends likely to be cut or disappear.
- Five-year dividend growth rates in the 70th percentile. You want companies that have shown a track record of increasing their payouts.
- Dividends to free cash flow of around 50% or less. This one I check for manually after the initial screening.
There were 62 stocks that came up based on the first four criteria. Here are five that passed the final test and are worth a closer look, based on safety of the dividend and long term catalysts.
These companies are not just solid values with fundamental catalysts; they are also well run financially. That is a comforting thought, especially if you are living on those dividend checks.