4 Picks with Strong Payout Ratios

07/12/2016 9:00 am EST

Focus: STOCKS

Charles Carlson

Editor, DRIP Investor

One of the best indicators of a company’s dividend health is the payout ratio. The payout ratio looks at the percentage of profits a firm is paying out to shareholders in dividends, states Chuck Carlson, editor of DRIP Investor.

For example, a firm that is expected to earn $3 per share in profits in 2016 and pays dividends at an annualized rate of $1 per share has a payout ratio of 0.33, or 33% (1 divided by 3).

As you can tell from this example, the higher the payout ratio, the greater the portion of profits the firm is paying out in dividends.

The payout ratio provides a quick snapshot of the cushion the firm has to maintain and increase its dividend.

If a company is consistently paying more in dividends than profits, the dividend will eventually be cut or omitted.

Conversely, companies that are paying out a small percentage of their profits in dividends have room to expand their dividend, especially if the bottom line is advancing.

In my latest screen, I looked at stocks with payout ratios below 30%, dividend yields of at least 1%, and expected earnings growth in the current fiscal year of at least 5%.

The combination of earnings growth and below-average payout ratios should lead to dividend increases of at least 5% over the next 12 months.

We also focused only on stocks that offer direct-purchase plans whereby any investor may buy the first share and every share directly from the company.

Among the stocks meeting these criteria, I think media stocks Walt Disney (DIS) and Scripps Networks Interactive (SNI) are especially attractive values.

Southwest Airlines (LUV), which recently received approval to begin routes to Cuba, has been roughed up of late and is offering good value for patient investors.

S&P Global (SPGI), a data and analytics firm, also has near-term appeal is a name that is not likely familiar to many of you. But the firm’s former name is likely to ring bells — McGraw-Hill Financial.

The company changed its name to S&P Global at the end of April to reflect the firm’s evolution away from publishing to focus on market intelligence and analytics.

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By Chuck Carlson, Editor of DRIP Investor

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