Written by Alexander Crawford

Do you prefer stocks that pay part of their return in dividend income? For ideas on how to start your search, we ran a screen on dividend-paying names.

We began with stocks paying dividend yields above 1% and sustainable payout ratios below 50%. Since company profits fund the dividend, we then screened for those with high profitability, with higher gross, operating, and pretax margins than their industry peers. This indicates that these companies may be in a better position to continue paying their dividend yields.

Finally, we ran DuPont analysis on the companies to find those with strong sources of profitability.

DuPont analyzes return on equity (net income/equity) profitability by breaking ROE up into three components:

ROE

= (Net Profit/Equity)

= (Net profit/Sales)*(Sales/Assets)*(Assets/Equity)

= (Net Profit margin)*(Asset turnover)*(Leverage ratio)

It therefore focuses on companies with the following positive characteristics: Increasing ROE along with,

•Decreasing leverage, (i.e. decreasing Asset/Equity ratio)

•Improving asset use efficiency (i.e. increasing Sales/Assets ratio) and improving net profit margin (i.e. increasing Net Income/Sales ratio)

Companies with all of these characteristics are experiencing increasing profits due to operations and not to increased use of financial leverage.

Interactive Chart: Press Play to compare changes in average analyst recommendation over the last two years for the stocks mentioned below.






Business Section: Investing Ideas

These are the results of the screen listed below - these dividend stocks have high profit margins, as well as strong trends in sources of change in profitability.


Do you think these companies have the profits to continue funding their dividends? (Click here to access free, interactive tools to analyze these ideas.)

1. CONSOL Energy Inc. (NYSE:CNX): Engages in the production of multi-fuel energy and provision of energy services primarily to the electric power generation industry in the United States. Dividend yield at 1.43%. Payout ratio at 15.23%. TTM gross margin at 30.7% vs. industry average at 27.99%. TTM operating margin at 15.55% vs. industry average at 10.37%. TTM pretax margin at 13.21% vs. industry average at 10.55%. MRQ net profit margin at 12.69% vs. 7.7% y/y. MRQ sales/assets at 0.123 vs. 0.112 y/y. MRQ assets/equity at 3.469 vs. 4.099 y/y

2. Flowserve Corp. (NYSE:FLS): Develops, manufactures, and sells precision engineered flow control equipment. Dividend yield at 1.22%. Payout ratio at 16.37%. TTM gross margin at 35.88% vs. industry average at 31.99%. TTM operating margin at 13.38% vs. industry average at 12.99%. TTM pretax margin at 13.03% vs. industry average at 11.%. MRQ net profit margin at 9.89% vs. 9.87% y/y. MRQ sales/assets at 0.274 vs. 0.256 y/y. MRQ assets/equity at 2.037 vs. 2.121 y/y

3. Kennametal Inc. (NYSE:KMT): Manufactures and supplies tooling, engineered components, and advanced materials consumed in production processes worldwide. Dividend yield at 1.20%. Payout ratio at 13.54%. TTM gross margin at 40.83% vs. industry average at 31.99%. TTM operating margin at 15.73% vs. industry average at 12.99%. TTM pretax margin at 14.4% vs. industry average at 11.%. MRQ net profit margin at 11.48% vs. 7.68% y/y. MRQ sales/assets at 0.243 vs. 0.236 y/y. MRQ assets/equity at 1.642 vs. 1.646 y/y

4. Snap-on Inc. (NYSE:SNA): Manufactures and markets tools, diagnostics, equipment, software, and service solutions for professional users in the United States, the United Kingdom, Canada, Germany, Japan, France, Australia, Spain, the Netherlands, Italy, China, and Sweden. Dividend yield at 2.23%.Payout ratio at 27.76%. TTM gross margin at 51.85% vs. industry average at 32.%. TTM operating margin at 15.76% vs. industry average at 13.%. TTM pretax margin at 14.02% vs. industry average at 11.01%. MRQ net profit margin at 10.09% vs. 8.31% y/y. MRQ sales/assets at 0.201 vs. 0.187 y/y. MRQ assets/equity at 2.399 vs. 2.686 y/y

5. Symetra Financial Corporation (NYSE:SYA): Operates as a financial services company in the life insurance industry in the United States. Dividend yield at 2.47%. Payout ratio at 13.13%. TTM gross margin at 15.56% vs. industry average at 14.32%. TTM operating margin at 15.56% vs. industry average at 11.41%. TTM pretax margin at 13.96% vs. industry average at 8.64%. MRQ net profit margin at 13.21% vs. 12.56% y/y. MRQ sales/assets at 0.02 vs. 0.019 y/y. MRQ assets/equity at 9.002 vs. 10.769 y/y.

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Disclosure: Kapitall's Alexander Crawford does not own any of the shares mentioned above. Profitability data sourced from Fidelity, accounting data sourced from Google Finance.

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