Looking for stocks paying dividend income? It's important to keep several things in mind if you want to be able to rely on a company's dividend payment. After all, just because a company has paid dividends does not guarantee they'll continue to do so.
One of the most important considerations for a stock's dividend is whether the company has strong profitability. If a company's profitability suffers, their dividend may be the first to go. There are hundreds of different ways to look at a company's profitability, but one of analysts' most popular is called DuPont analysis.
DuPont analyzes the return on equity (ROE) profitability of a company, measured by net income/equity.
ROE can be broken up into three components such that increases in ROE can be attributed to those components.
= (Net Profit/Equity)
= (Net profit/Sales)*(Sales/Assets)*(Assets/Equity)
= (Net Profit margin)*(Asset turnover)*(Leverage ratio)
Analyzing the sources of returns for a company, you can focus on companies with the following 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)
Companies passing all requirements are thus experiencing increasing profits due to operations and not to increased use of leverage.
To give you a starting point, we ran a screen on the S&P 500's dividend stocks for those passing DuPont analysis with flying colors. These stocks have seen increasing ROE profitability with increases in efficiency and profit margin, as well as decreases in leverage.
Do you think these companies pay reliable dividends?
List sorted by dividend yield. (Click here to access free, interactive tools to analyze these ideas.)
2. NYSE Euronext
3. General Electric
4. The Dow Chemical
5. Northrop Grumman
8. Wisconsin Energy
9. Honeywell International
Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.
Kapitall's Alexander Crawford does not own any of the shares mentioned above. Accounting data sourced from Google Finance. Profitability data sourced from Fidelity.
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