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.
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|
|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|
|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|
|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|
|ARROW FINANCIAL||AROW||Regional Banks||12.5||4.1||15.3||30.4|
|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|
|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|
|MOCON||MOCO||Electronic Equipment ||18.7||2.3||15.5||20.5|
|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|
|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|
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!
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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