• The First Cut
  • 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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