Looking for Dividend Stocks with Buffett’s Criteria
By Nilus Mattive | July 27, 2011 |

I’ve praised Warren Buffett in this space before, and for good reason — he has one of the most successful — and longest-running — investment track records in the world.

Better yet, he always manages to keep a level head even when the markets are going haywire. In fact, he has almost always managed to use those times to make masterful moves that yield longer-term profits.

And I would argue that his success is largely based on his ability to relentlessly focus on important fundamental measures of a business’ worth … regardless of what others are currently thinking.

Of course, dividends are an area where Warren and I somewhat disagree … or at least where our purposes dictate we differ.

It’s not that Buffett doesn’t buy dividend-paying companies. In fact, many of his biggest holdings — stocks like Coca-Cola and Procter & Gamble — are among the elite stocks that I like to call “dividend superstars.”

Of course, I tend to emphasize dividend payments far more than Buffett does.

That’s why I recently combined some of Buffett’s favorite fundamental measures with a couple of dividend metrics to come up with a short list of stocks worth investigating further.

Here’s what I came up with …

NAMESYMBOLINDUSTRYP/EIND. YIELDROEPROFIT MARGIN
UNIVERSAL INSURANCEUVEProperty & Casualty Ins.4.38.564.826.0
MESABI TRUSTMSBSteel14.67.01341.697.4
TERRA NITROGENTNHFertilizers & Agricultural Chem.9.27.0110.735.7
UNILENS VISIONUVICHealth Care Supplies9.55.127.139.6
CHEROKEECHKEApparel18.54.766.842.0
LORILLARDLOTobacco14.74.7145.140.3
TECHNICAL COMMUNICATIONSTCCOCommunications Equipment2.44.728.549.8
BRIDGE BANCORPBDGERegional Banks14.34.416.125.2
EASTERN AMERICAN NAT. GASNGTOil & Gas Exploration & Prod.25.04.348.970.1
MICROCHIP TECHNOLOGYMCHPSemiconductors16.24.221.231.0
CTC MEDIA INCCTCMBroadcasting22.74.220.636.1
MERCHANTS BANCSHARESMBVTRegional Banks11.04.215.428.0
PAYCHEXPAYXData Processing21.24.135.438.0
ARROW FINANCIALAROWRegional Banks12.54.115.330.4
INTELINTCSemiconductors10.23.716.136.8
JOHNSON & JOHNSONJNJPharmaceuticals13.63.324.327.5
SOUTHSIDE BANCSHARESSBSIRegional Banks9.63.318.428.7
WESTAMERICAWABCRegional Banks15.63.021.146.5
S.Y. BANCORPSYBTRegional Banks13.93.015.526.7
AXIS CAPITAL HOLDINGSAXSProperty & Casualty Ins.5.22.916.925.2
STRAYER EDUCATIONSTRAEducation Services14.02.948.434.1
U.S. GLOBAL INVESTORSGROWAsset Management17.82.832.324.3
AUTOMATIC DATA PROCESSINGADPData Processing21.02.727.320.9
ERIE INDEMNITYERIEProperty & Casualty Insurance26.32.725.820.4
ANALOG DEVICESADISemiconductors11.82.717.932.7
MOCONMOCOElectronic Equipment18.72.315.520.5
MICROSOFTMSFTSystems Software10.22.340.540.0
CKX LANDSCKXReal Estate Operating Co.29.02.118.277.8
T. ROWE PRICETROWAsset Management18.22.121.245.1
RLIRLIProperty & Casualty Ins.10.31.916.030.6
BUCKLEBKEApparel Retail14.91.729.922.6
CASS INFORMATION SYS.CASSData Processing16.41.717.229.0
OCCIDENTAL PETROLEUM.OXYIntegrated Oil & Gas12.81.720.539.7
CBOE HOLDINGSCBOESpecialized Finance20.41.742.537.7
COMPUTER SERVICESCSVIData Processing18.51.623.924.2
TEXAS INSTRUMENTSTXNSemiconductors13.51.622.932.6

Now, a Brief Explanation of What Particular
Measures I Used to Find These Companies …

I started with four of the same criteria that classic value investors like Benjamin Graham — and his more famous student Warren Buffett — have favored, including:

#1. A healthy return on equity: In plain English, return on equity (ROE) is net income divided by shareholder’s equity. It tells you how much profit a company can generate from what shareholders have invested. I opted for a five-year average ROE of 15 percent or better.

#2. Solid profit margins: This is a company’s net income divided by net sales. It’s a great way to determine how strong a company’s pricing power is, and how well it’s controlling costs. I screened for profit margins in excess of 20 percent.

#3. Low debt: As the name implies, a company’s debt-to-equity ratio tells you how much long-term debt it has. The higher the percentage, the more debt. That’s why I looked for stocks that had a total debt to total equity ratio under 20 percent. A few of the companies actually had ratios of zero, indicating no long-term debt at all!

#4. Plus, favorable valuations: There’s no point in getting a solid company at too high of a price. While there are lots of ways to gauge a stock’s valuation, the simplest method is using price-to-earnings ratios. Any company with a P/E over 30 was automatically ruled out in my search.

Then, I limited the results to companies that currently pay dividends worth at least 1.5 percent annually. Any company with a payout ratio above 70 percent was automatically eliminated … which ensured that the dividend was at least somewhat sustainable going forward.

Obviously, I’m not saying Buffett himself is considering investing in any of these companies. But I do think there are plenty of interesting opportunities to be found in this list … and I encourage you to do a little more digging on your own!

Best wishes,

-- Nilus MattiveSource: Money and Markets

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. To view archives or subscribe, visit http://www.moneyandmarkets.com.

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. To view archives or subscribe, visit http://www.moneyandmarkets.com.

 

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