10 Stocks With Sustainable Dividends

Two months ago, I wrote SDividend Yield: A Simple Indicator to Add to the Dividend Investing Toolbox, a post about a dividend indicator for finding high sustainable dividends. Since then, the ten stocks in the S&P 500 with the highest SDividend yields have outperformed the S&P 500 by almost 4% and the Dow Jones Select Dividend Index by 1.5%. Given the strong performance, I thought I would revisit the indicator and update the table.

Research has indicated that stocks with high yields and low payout ratios outperform stocks with high yields alone. To take advantage of this strategy, I created the SDividend yield, an indicator that “adjusts” the dividend for the payout ratio. Combining two indicators into one not only allows me to find stocks with high payout adjusted yields, it also allows me to easily compare one stock against another.

Because of the method of calculation, the value of the SDividend yield is lower than the normal dividend yield. The median SDividend yield for dividend paying stocks in the S&P 500 is around 1.1%, while the median of the normal dividend yield is around 2%.

	SDividend	Normal Dividend
Top Quartile	greater than 1.57	greater than 3.25
2nd Quartile	between 1.07 and 1.57	between 2.11 and 3.25
3rd Quartile	between 0.58 and 1.07	between 1.14 and 2.11
Bottom Quartile	less than 0.58	less than 1.14

Below is a list of the 10 stocks in the S&P 500 with the highest SDividend yield. Public Service Enterprise Group Inc. (PEG), Time Warner Cable Inc. (TWC), The Travelers Companies Inc.  (TRV), and Entergy Corporation (ETR) are new to this list, replacing The Chubb Corporation (CB), American Electric Power Co., Inc. (AEP), FPL Group Inc. (FPL), and Lockheed Martin Corporation (LMT)

Subscribers to our premium service can access a list of the SDividend yield for S&P 500 stocks as well as the SDividend yield for any single stock.

Company	Ticker	Dividend Yield (%)	SDividend Yield (%)
Merck & Co. Inc.	mrk	4.49	3.143
Eli Lilly & Co.	lly	5.975	2.92775
Exelon Corp.	exc	5.54	2.7146
Cincinnati Financial Corp.	cinf	5.895	2.65275
Constellation Energy Group Inc.	ceg	2.74	2.6304
Public Service Enterprise Group Inc.	peg	4.435	2.61665
Time Warner Cable Inc.	twc	2.935	2.55345
Ameren Corporation	aee	6.295	2.45505
The Travelers Companies Inc.	trv	2.93	2.3733
Entergy Corporation	etr	4.555	2.3686

Is Enterprise Value / Revenue a Better Price to Sales Ratio?

The Enterprise Value / Revenue ratio (“EV/Rev”) is an indicator similar to the Price / Sales ratio but with a difference that can make it superior. While both indicators have sales in the denominator, Enterprise Value / Revenue substitutes price with an alternative known as enterprise value.

Enterprise Value = Market Cap – Cash & Equivalents + Debt + Minority Interest + Preferred Shares
Often simplified as Market Cap – Cash & Equivalents + Debt

Enterprise value can be thought of as the true price of a business since buying a business includes receiving its cash and taking on its debt. Using enterprise value instead of market cap in a valuation metric has the effect of penalizing debt and rewarding cash.

However, problems arise when we look at stocks with the lowest EV/Rev.

The companies with the lowest positive ratios are those that have almost as much cash as market cap plus debt. When a company has more cash than market cap plus debt, the ratio becomes negative and can no longer be compared to other companies even though it may be a better value than a company with a low EV/Rev.

On the other hand, this is not a problem with large cap stocks. Stocks with negative enterprise values are mostly micro-cap stocks with troubled operating history.

In short, Enterprise Value / Revenue has an advantage over the similar Price / Sales ratio but also has a problem when applied to micro-cap stocks. Although it should not be the only indicator used to determine which stocks to invest in, it can be a powerful tool when combined with other indicators.

A few more thoughts:

• Free cash flow, or operating cash flow could be used instead of revenue, as could book value or earnings.
• Enterprise Value / Revenue compared to projected growth could be used similarly to the PEG ratio.
• Enterprise Value / Revenue data is available on Yahoo Finance.
• The median Enterprise Value / Revenue ratio is near 1.5.

Enterprise Value to Revenue is a component of our stock ratings, which combine multiple indicators into a single market beating system.

S&P 1500 Stocks with the Lowest Enterprise Value to Revenue Ratio

Company	Ticker	Enterprise Value / Revenue
WellCare Health Plans Inc.	wcg	0.02
Humana Inc.	hum	0.04
Health Net Inc.	hnt	0.07
Ingram Micro Inc.	im	0.07
Tech Data Corp.	tecd	0.07
Molina Healthcare Inc.	moh	0.07
World Fuel Services Corp.	int	0.09
ResMed Inc.	rmd	0.1
StarTek Inc.	srt	0.11
AmerisourceBergen Corporation	abc	0.12
Cardinal Health Inc.	cah	0.12
Office Depot Inc.	odp	0.13
Kelly Services Inc.	kelya	0.13
Eastman Kodak Co.	ek	0.14
The Great Atlantic & Pacific Tea Company Inc.	gap	0.14
Nash Finch Co.	nafc	0.14
Novatel Wireless Inc.	nvtl	0.14
Stewart Information Services Corp.	stc	0.14
SYNNEX Corp.	snx	0.14

Disclosure: None

SDividend Yield: A Simple Indicator to Add to the Dividend Investing Toolbox

In their research paper, “High Yield, Low Payout”, Credit Suisse analysts Pankaj N. Patel, Souheang Yao and Heath Barefoot found that the combination of a high dividend yield and a low payout ratio performed better than high yield alone.

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=946448

To be able to follow a strategy such as the one in the paper, I created a simple indicator that combines both the dividend yield and the payout ratio. It does this by “adjusting” the dividend for the payout ratio. The formula is as follows.

SDividend Yield = (Dividend*(1-Payout Ratio))/Price
Where
Payout Ratio = Dividend/Earnings

The SDividend yield can be used to compare the dividend yield and payout ratio of stocks at the same time. This is useful for sorting stocks by yield while ensuring that the yield is sustainable.

SDividend yields and normal dividend yields cannot be compared to each other. The median SDividend yield for dividend paying stocks is slightly below one, whereas that of the regular dividend yield is closer to three. The SDividend yield for a stock can also be negative. This is caused by a payout ratio of over 100%. These companies are ones with which extra caution should be taken because there is a low chance of the company continuing to pay dividends.

Although I do not think this should be the only indicator used in dividend investing, I believe it can be a very useful addition to the toolbox of a dividend investor. It is also not a replacement for the dividend yield because the dividend yield IS the actual yield whereas the SDividend yield is not. Nevertheless, by using the SDividend yield instead of the regular dividend yield, we can gain a more accurate depiction of which stocks have high dividend yields combined with low payout ratios.

The 10 stocks in the S&P 500 with the highest SDividend yield are as follows. This is not a list of stocks to buy but rather a list of stocks to do further research on.

Name	Ticker	Price	Stock Rank	SDividend Yield (%)
Merck & Co. Inc.	mrk	37.71	80.910	2.93
Eli Lilly & Co.	lly	36.15	81.523	2.705
Ameren Corporation	aee	26.45	51.465	2.61
Constellation Energy Group, Inc.	ceg	36.05	88.550	2.57
Exelon Corp.	exc	44.28	65.428	2.31
Cincinnati Financial Corp.	cinf	29.08	80.309	2.22
The Chubb Corporation	cb	52.05	83.490	2.17
American Electric Power Co., Inc.	aep	34.49	55.907	2.15
FPL Group Inc.	fpl	48.84	62.396	2.13
Lockheed Martin Corporation	lmt	83.88	70.308	2.1