October 7, 2015
I Found 10 High-Quality Dividend Stocks Using This Simple Metric
By Nathan Slaughter
As someone who was taught as a kid to hate waste, I love efficiency. That means doing little things that enable me to run my household for less -- and deposit the savings into my portfolio.
I wouldn't necessarily call it penny pinching, just a conscious effort to maximize the return from every dollar spent. As an investor, I look for managers with the same mindset because even minor improvements with multi-billion dollar organizations can mean a big difference on the bottom line.
Take UPS (NYSE: UPS), for example. In an effort to increase efficiency, the company has used technology to optimize delivery routes, calculating that a reduction of one mile per driver per day can save $50 million a year.
You can't get at the heart of this important concept by looking at familiar measures like operating margins and earnings. Those earnings must be placed in the proper context.
Suppose there are two popular restaurant chains vying for a spot in your portfolio. One posted $515 million in net income last year, while the other earned $710 million. We can't draw many conclusions from this information alone, except that the second business earned nearly $200 million more.
But how much did it have to invest in order to get there? That's the real question.
What if I told you that the first company needed $2.5 billion in property, plants, equipment and other assets to run its business, while the second required $6.0 billion? So the second company has more than double the asset base, but only makes 38% more profit.
This isn't a hypothetical example -- both are companies you probably know well. The first owns the Olive Garden casual dining chain, while the second is a popular Tex-Mex chain.
|Return on Assets
Here's how I like to explain it.
Fuel-conscious drivers might choose a vehicle that gets 20 miles a gallon over a similar model in the same class that only gets 15. That better fuel efficiency means they can travel 360 miles on an 18-gallon tank, where others making the same trip would burn through 24 gallons. Or, they could use the same 24 gallons and travel 432 miles.
In a similar way, return on assets (ROA) helps measure the efficiency of a business. It tells us how much a company earns per dollar of assets at its disposal.
Darden may have "driven" further than Chipotle last year, but that's only because it has a much bigger tank. Chipotle is actually getting almost twice the profit per dollar of assets. So when it grows in size to $6.0 billion (assuming the same return on assets), it will be churning out $1.2 billion in yearly net income, versus Darden's $710 million.
I don't mean to pick on Darden, which has really turned around its operations recently and rewarded investors with a 55% gain over the past five years -- but that still falls well short of CMG's 298%.
This is exactly why I look for well-managed companies that can match the earnings power of their rivals with far less invested capital -- or utilize the same capital and generate far more.
In fact, I shared the results of a screen I recently executed with readers of my premium newsletter, High-Yield Investing. To illustrate my point, I'll share it with you today.
My screen dug up the following list of candidates with superior returns on assets (ROA) of 14% or better and generous yields of at least 4%. Take a look...
As with any metric, ROA only shows part of the full picture and should be weighed in conjunction with other factors. Plus, it's best to compare companies operating within the same industry, as different sectors have varying degrees of asset intensity.
||Return on Assets (ROA)
|Macqurie Infrastructure (MIC)
|Philip Morris (PM)
|Seagate Technology (STX)
|Terra Nitrogen (TNH)
|Waddell & Reed (WDR)
|Magellan Midstream (MMP)
|World Point Terminals (WPT)
|PetMed Express (PETS)
That being said, this is a great starting point to identify efficient, high-yielding candidates for your portfolio. These companies are out-earning most other businesses pound-for-pound, and willing to share the take with stockholders.
Buckle (NYSE: BKE) is an interesting name on this list. It pays a regular special dividend -- and as you can see, it generates an especially superior ROA considering its industry (clothing retail). PetMed Express (Nasdaq: PEMS) is another company I've written about favorably in the past in my premium newsletter.
Terra Nitrogen (NYSE: TNH) is another company I find interesting, as demand for crop nutrients is unwavering. Market weakness has driven the stock from $158 back down to $109 -- lifting the yield to 8.7%.
I don't think the time is right to buy just yet, particularly as there are some unresolved questions pertaining to the tax treatment of MLPs in the fertilizer industry. But this is one to put on the watch list.
Chief Investment Strategist
P.S. If you're looking for other superior performing companies that offer generous yields of up to 8.7%... 9.1%... and 13%, then you'll love the stocks that made my new "High-Yield Hall of Fame Class of 2015." As a group these firms have raised their dividends more than 150 times in the past decade, and posted average returns of more than 300%.
Now is the perfect time to buy shares of any of these elite, yet under-the-radar firms. And you can get the names and ticker symbols of each of them in my new report "The High-Yield Hall of Fame Class of 2015." To access the report, just click here.