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 …

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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