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High Quality + High Yield + High Growth Stocks

by John Bajkowski

High Quality + High Yield + High Growth Stocks Splash image

Lowell Miller is known for investing in high-quality growth stocks with high and growing dividends. Miller argues that high-yielding stocks have performed well after past bear markets, especially ones induced by a recession. Even in the current environment, 1,700 firms raised their dividend last year. This issue’s First Cut looks for stocks that follow the quantitative screen presented in Miller’s book “The Single Best Investment: Creating Wealth With Dividend Growth” (2006; www.mhinvest.com).

Miller starts out by looking for firms with low debt, strong cash flow, and strong overall credit-worthiness. As a measure of financial leverage, companies with a debt-to-capital ratio of 50% or lower made the First Cut [capital consists of debt plus equity]. To help judge the likeliness of continued dividend payments, Miller looks for a payout ratio [dividends divided by earnings] below 60%, or 85% for utilities. All First Cut companies were also required to have cash flow three times the level of their indicated dividend. Dividends cannot be paid until all cash obligations are satisfied, so Miller recommends an interest coverage ratio [EBITDA divided by interest] of four, or two for utilities.

Miller feels that dividend growth is critical. At a minimum, dividend growth should exceed the rate of inflation. Dividends are paid from the income stream, so earnings must also be expected to expand. The First Cut firms have a dividend growth rate of at least 4%, while the historical and expected earnings growth rate is at least 5%.

To measure the level of the dividend yield [dividend divided by price], Miller prefers to compare the company’s yield to the market’s. Optimally, the yield should be 1.5 to 2.0 times the S&P 500 yield, which is currently around 2.5%. We were not able to meet this requirement but keep all of Miller’s measures of financial quality and growth. The First Cut presents the 30 stocks with the highest dividend yield. As a final screen, only domestic exchange-listed stocks made the First Cut.

Company (Exchange: Ticker) LT Debt
to
Capital
(%)
Payout
Ratio
(%)
Dividend Yield Growth Rate Current
Price
($)
Relative
Strength
Index
(S&P = 0)
 
 
 
Description
Historical
Div
(%)
Historical
EPS
(%)
Expected
EPS
(%)
Current
(%)
7-Yr Avg
(%)
Overseas Shipholding Group (N: OSG) 42.5 12.3 5.6 2.0 14.0 20.1 10.0 31.17 -39 bulk shipping
Twin Disc, Inc. (M: TWIN) 32.2 19.7 4.0 2.6 6.0 21.5 10.0 7.07 -38 power transmit equip
Norfolk Southern Corp. (N: NSC) 40.0 29.5 3.9 1.5 26.1 24.9 10.6 35.08 -12 freight railroad
Sempra Energy (N: SRE) 43.0 29.5 3.5 3.1 4.6 8.5 7.8 44.25 21 energy servs holding co
South Jersey Industries (N: SJI) 40.0 40.6 3.5 3.6 6.0 12.6 7.0 34.45 44 energy servs holding co
Marathon Oil Corp. (N: MRO) 28.5 22.1 3.4 2.6 11.1 53.3 7.0 28.63 -13 oil & natural gas
CSX Corporation (N: CSX) 49.4 26.7 3.2 1.2 9.8 25.6 10.0 27.67 -32 rail & intermodal servs
Dover Corporation (N: DOV) 33.0 35.6 3.2 1.7 8.2 14.4 15.3 31.15 -7 industrial prods
Cooper Industries, Ltd. (N: CBE) 26.0 23.0 3.1 2.5 5.2 16.8 10.0 32.56 15 electrical prods & tools
McGraw-Hill Companies, Inc. (N: MHP) 49.2 35.7 3.0 1.7 8.7 14.7 9.0 30.12 9 info servs provider
J.C. Penney Company, Inc. (N: JCP) 41.9 37.2 3.0 1.8 6.9 38.8 12.7 26.54 -8 retailer holding co
United Technologies Corp. (N: UTX) 37.1 30.0 3.0 1.7 17.0 13.7 9.0 51.28 11 tech prods for buildings
Pentair, Inc. (N: PNR) 34.5 19.9 2.9 1.8 10.0 31.7 12.1 25.26 10 water & tech prods
General Dynamics Corp. (N: GD) 23.3 22.7 2.8 1.6 14.0 15.0 9.0 55.01 -5 air, ship & combat prods
MTS Systems Corp. (M: MTSC) 0.0 23.0 2.8 1.4 14.0 27.8 7.0 21.09 -4 mechanical test sys
Apogee Enterprises, Inc. (M: APOG) 2.6 16.8 2.7 1.8 5.0 10.1 13.3 12.17 -14 glass prods & servs
Carlisle Companies, Inc. (N: CSL) 18.2 29.5 2.7 1.7 5.6 12.2 12.0 22.64 14 manufacturing holding co
Owens & Minor, Inc. (N: OMI) 23.4 31.8 2.7 1.8 16.8 18.7 11.0 34.07 18 medical & surgical supplies
Raytheon Company (N: RTN) 20.0 27.1 2.7 2.2 9.3 21.5 11.7 46.07 13 sys for government
A. O. Smith Corporation (N: AOS) 33.5 27.4 2.7 1.9 5.2 23.8 10.0 28.28 26 water equip & elec prods
Brown-Forman Corp. (N: BF.B) 26.7 30.9 2.5 1.7 10.6 11.3 7.5 46.03 27 brand alcoholic beverages
EQT Corporation (N: EQT) 36.4 44.2 2.5 2.2 15.5 7.9 11.7 35.56 -21 oil & natural gas
Holly Corporation (N: HOC) 42.4 22.3 2.5 1.1 29.2 24.8 15.5 23.53 -7 petroleum refining
Rockwell Collins, Inc. (N: COL) 12.5 22.6 2.5 1.3 36.6 27.7 17.7 38.22 -7 aviation electronics
Ameron International Corp. (N: AMN) 6.9 20.8 2.4 1.8 8.7 8.7 11.0 50.85 -25 engineered prods
Burlington Northern Santa Fe (N: BNI) 45.2 26.7 2.4 1.5 17.0 18.4 6.8 67.14 0 freight rail holding co
Cummins Inc. (N: CMI) 16.8 22.2 2.4 1.9 10.4 34.0 10.3 29.55 -35 engines, power sys
Exxon Mobil Corp. (N: XOM) 6.2 20.9 2.4 2.2 7.9 21.6 7.0 69.11 22 oil & natural gas
W.W. Grainger, Inc. (N: GWW) 19.5 26.6 2.4 1.6 12.0 18.7 11.2 77.71 37 facility maintenance prods
Parker-Hannifin Corp. (N: PH) 29.3 22.2 2.3 1.3 8.6 16.0 10.0 43.66 -17 motion & control sys

 

John Bajkowski is president of AAII.


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