Following my recent post on the relationship between higher payout ratio and higher future earnings growth, Pierre-Olivier of www.jourly.com asked me who I thought were the best US dividend plays in the US…and while I had some ideas based on stocks I have reviewed since creating Margin of Safety Investing, I thought I should try and answer the question based on the entire US stock universe, not just the stocks I have analyzed so far.

To do so, I first generated a list of US companies using Morningstar’s stock screener using the following criteria:

- Market capitalization > $100M

- Dividend yield > 2%, making sure we are looking at the highest dividend payers (current S&P dividend yield = 2.3%)

- Payout ratio of 60% or less: I usually want companies to have enough cash to keep growing and hence prefer company with manageable payout ratios

- I excluded financial services companies as I generally do not really know how to analyze/value them

- Using Morningstar’s rating as a first pass, I set my screen to only select companies with a “Financial health grade” of B or better

These criteria lead us to a list of c.180 stocks (much more than I was expecting), representing $4.6T of cumulative market cap!

You can find the list of companies and the key metrics that I will be using for the selection of the best US dividend payers in this Google Doc.

Now, in order to select the best stocks among those 182, I will use filters along the three risk categories I usually review:

1- Business risk

In order to evaluate business performance, I usually look into ROE and ROA over time as a starting point. Using ROE>12%and ROA>6% both on a Trailing Twelve Month and 5-year average, our list of potential best dividend payers comes down to 82 candidates.

In addition to good returns, I usually screen out companies experiencing very low growth or revenue declines. By filtering out companies having a 3-year revenue growth of 1% or less, our list of candidates drops to 53 stocks.

2- Balance sheet risk

I prefer companies with conservative balance sheets and usually look at current ratios, debt/equity and Debt/FCF. As current ratios level are often “industry dependant” I will only use Debt/Equity as a criteria here. Using Debt / Equity 5% leaves us with 18 companies.

Name	Ticker	% ROE 5 Year	% ROA 5 Year	% Dividend Yield	Debt to Equity	Price/ Earnings Trailing
Abbott Laboratories	ABT	22.9	10.1	3.6	0.6	15.6
Analog Devices, Inc.	ADI	20.1	15.8	2.3	0.1	16.2
AstraZeneca PLC ADR	AZN	38.7	16.6	5.0	0.4	8.7
AZZ, Inc.	AZZ	18.8	11.0	2.6	0.5	14.8
Bristol-Myers Squibb Company	BMY	37.7	15.7	4.9	0.4	9.7
Cal-Maine Foods, Inc.	CALM	28.3	14.3	3.1	0.3	10.3
ConAgra Foods, Inc.	CAG	16.2	6.5	3.7	0.7	13.7
Darden Restaurants, Inc.	DRI	24.5	8.7	2.3	0.8	16.6
Eli Lilly and Company	LLY	19.9	7.9	5.6	0.6	8.0
Flowers Foods, Inc.	FLO	15.9	9.2	3.1	0.2	17.2
General Dynamics	GD	20.6	8.5	2.4	0.2	10.7
Harris Corporation	HRS	18.6	8.8	2.0	0.5	9.6
Johnson & Johnson	JNJ	28.1	15.8	3.4	0.2	12.7
Kimberly-Clark Corporation	KMB	32.3	9.6	4.3	0.8	13.3
Medtronic, Inc.	MDT	22.7	12.1	2.4	0.5	12.4
Merck & Co Inc	MRK	29.0	12.0	4.2	0.3	13.8
Microsoft Corporation	MSFT	40.6	21.5	2.0	0.2	11.8
Novartis AG ADR	NVS	19.3	11.9	3.0	0.2	12.5
PepsiCo, Inc.	PEP	35.6	15.9	2.9	0.9	16.4
Procter & Gamble Company	PG	19.4	8.7	3.0	0.4	17.7
Raytheon Company	RTN	15.5	7.0	3.2	0.2	9.5
Telecommunications of Sao Paulo ADR	TSP	23.9	12.9	4.1	0.1	8.8
Tupperware Brands Corporation	TUP	28.4	7.3	2.1	0.6	13.4
United Breweries Company, Inc. ADR	CCU	19.7	9.4	2.1	0.5	15.1
United Technologies	UTX	22.2	7.8	2.2	0.5	17.1
VF Corporation	VFC	16.7	9.3	2.8	0.2	16.4
Wal-Mart Stores, Inc.	WMT	20.7	8.3	2.2	0.7	12.9

As you can see, a lot of companies are Drug manufacturers which I tend to avoid as a lot of them face major patent cliff and thus potential for large revenue drops. However amongst those 18 companies, I think one can find some of the best US-listed dividend payers, with strong returns, good dividends, conservative balance sheets are reasonable valuations!

It’s reassuring to me to see that I have already performed a stock reviews of a number of these stocks and put them in my watchlist.

Many happy returns

Ben

http://marginofsafetyinvesting.com

The Strategy of Ben Graham – Warren Buffett’s Mentor

From 1923 to 1957 Warren Buffett’s mentor, Ben Graham, followed a strategy of investing in net-nets. He said: “It always seemed, and still seems ridiculously simple to say that if one can acquire a diversified group of common stocks at a price less than the...net current assets alone…the results should be quite satisfactory. They were so in our experience, for more than 30 years.”
Today net-nets are rare. They are collected under GuruFocus’ Net-Net Screener. GuruFocus also publishes a monthly newsletter which recommends the safest net-nets. All of these are included in GuruFocus Premium Membership.

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