Written by Alexander Crawford



It appears that the age of company cash hoarding is behind us - Standard & Poor's is predicting that the S&P 500 index will pay a record total dollar amount of dividends this year, beating the current record of $247.9 billion in 2008.

This could be a result of improved economic outlooks on the part of company management, or it could be from the belief that investors now prefer dividend-yielding names, or both.

"I think there's a change in investor appetite for risk, and that in the last couple of years that has resulted in better performance for dividend-paying stocks," said Gina Martin Adams, Wells Fargo institutional equities strategist. (via CNBC)

According to Adams, companies are just beginning to catch on to the fact that investors are seeking dividend-paying stocks and will reward them.

Interactive Chart: Press Play to compare changes in market cap over the last two years for the stocks mentioned below.



Business Section: Investing Ideas
To give some ideas on how to look for dividend stocks, we ran a screen on stocks paying dividend yields above 2% and sustainable payout ratios below 50%. We screened these stocks for those with low levels of debt, which is considered a sign of a strong dividend.

We then found those companies that have high profitability, with higher gross, operating and pretax margins. Finally, we screened for those that appear undervalued, with high ratios of levered free cash flow/enterprise value.

Do you think these companies will be increasing their dividends this year? (Click here to access free, interactive tools to analyze these ideas.)

1. HCC Insurance Holdings Inc. (NYSE: HCC): Provides property and casualty, surety, group life, accident, and health insurance coverage, as well as related agency and reinsurance brokerage services to commercial customers and individuals worldwide. Dividend yield at 2.10%, payout ratio at 24.34%. Total debt/equity at 0.15. TTM gross margin at 17.87% vs. industry average at 12.66%. TTM operating margin at 17.11% vs. industry average at 10.01%. TTM pretax margin at 16.17% vs. industry average at 9.02%. Levered free cash flow at $661.50M vs. enterprise value at $3.34B (implies a LFCF/EV ratio at 19.81%).

2. KLA-Tencor Corporation (Nasdaq: KLAC): Engages in the design, manufacture, and marketing of process control and yield management solutions for the semiconductor and related nanoelectronics industries. Dividend yield at 2.85%, payout ratio at 26.45%. Total debt/equity at 0.25. TTM gross margin at 61.96% vs. industry average at 59.35%. TTM operating margin at 34.28% vs. industry average at 23.4%. TTM pretax margin at 32.53% vs. industry average at 22.57%. Levered free cash flow at $702.17M vs. enterprise value at $6.81B (implies a LFCF/EV ratio at 10.31%).

3. USA Mobility, Inc. (Nasdaq: USMO): Provides wireless communications solutions to the healthcare, government, enterprise, and emergency response sectors in the United States. Dividend yield at 6.71%, payout ratio at 40.33%. Total debt/equity at 0.12. TTM gross margin at 66.92% vs. industry average at 60.66%. TTM operating margin at 28.7% vs. industry average at 21.41%. TTM pretax margin at 26.51% vs. industry average at 16.64%. Levered free cash flow at $51.33M vs. enterprise value at $313.28M (implies a LFCF/EV ratio at 16.38%).

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

Alexander Crawford does not own any of shares of the companies mentioned above. Profitability data sourced from Yahoo! Finance.

Related Articles
  1. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  2. Investing News

    Icahn's Bet on Cheniere Energy: Should You Follow?

    Investing legend Carl Icahn continues to lose money on Cheniere Energy, but he's increasing his stake. Should you follow his lead?
  3. Stock Analysis

    Analyzing Google's Return on Equity (ROE) (GOOGL)

    Learn about Alphabet's return on equity. How has its ROE changed over time, how does it compare to its peers and what factors are driving ROE for the company?
  4. Investing News

    Is Buffett's Bet on Oil Right for You? (XOM, PSX)

    Oil stocks are getting trounced, but Warren Buffett still likes one of them. Should you follow the leader?
  5. Investing News

    Chipotle Served with Criminal Probe

    Chipotle's beat muted expectations and got a clear bill from the CDC, but it now appears that an investigation into its E.coli breakout has expanded.
  6. Stock Analysis

    Analyzing Sprint Corp's Return on Equity (ROE) (S)

    Learn about Sprint's return on equity. Find out why its ROE is negative and how asset turnover and financial leverage impact ROE relative to Sprint's peers.
  7. Stock Analysis

    Why Alphabet is the Best of the 'FANGs' for 2016

    Alphabet just impressed the street, but is it the best FANG stock?
  8. Investing News

    A 2016 Outlook: What January 2009 Can Teach Us

    January 2009 and January 2016 were similar from an investment standpoint, but from a forward-looking perspective, they were very different.
  9. Mutual Funds & ETFs

    3 Vanguard Equity Fund Underperformers

    Discover three funds from Vanguard Group that consistently underperform their indexes. Learn how consistent most Vanguard low-fee funds are at matching their indexes.
  10. Investing News

    Alphabet Earnings Beat Expectations (GOOGL, AAPL)

    Alphabet's earnings crush analysts' expectations; now bigger than Apple?
RELATED FAQS
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
COMPANIES IN THIS ARTICLE
Trading Center