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October, 2013


In the past decade, we have seen volatility in the stock market, two major recessions, and repeated partisan undermining of the nation's global financial leadership. The typical investor has experienced less than half the historic S&P 500 Index gains.

People now understandably want an edge when it comes to equities, or else they would rather just avoid securities altogether. A proven principle espoused by both Ben Graham and Warren Buffett is the margin of safety. Buffett in particular suggests that we invest in such a way that we not lose money. Having a margin of safety before buying a fraction of any business is one of his success keys.

For dividend paying low price to value stocks, such an extra margin of safety is the payout ratio, defined as the amount per share paid in a year as dividends divided by the yearly earnings per share. It is also described as simply the ratio of dividends to net income. Everything else being equal, the lower the dividend payout ratio, the better for the safety of a company's dividend. A high dividend ratio, on the other hand, often means increased risk that adverse circumstances may lead to a cut or suspension of the company's income distributions to shareholders.

Higher dividend payout ratios may indicate that the company is giving its shareholders so much of its cash reserves that it exceeds total earnings, an unsustainable circumstance. Payout ratios above 100%, for example, unless for just one-time special dividends to reduce excess cash, can be red flags showing instability and poor management.

As a general rule, it is considered wise to invest in companies whose dividend payout ratios are 0.5 or below, meaning that there are at least twice as many earnings as the amount of net income being returned to shareholders in yield.

One can find a number of low price to value companies offering high dividends, yet relatively few with this extra margin of safety.

Here are ten stocks with both reasonably low price to value and low dividend payout:

Agrium, Inc.AGU$86.862.6%16%Forward dividend estimate 3.6%.
Baker Hughes, Inc.BHI$55.151.2%27%Recent jump in revenue. Earnings above estimates.
Canon, Inc.CAJ$32.223.3%27%High projected dividend. High quality company.
CSP, Inc.CSPI$6.895.7%27%High dividend. Low trailing price to earnings.
Ensco, Plc.ESV$55.043.4%33%Low projected price to earnings. High dividend.
Golar LNG, Ltd.GLNG$36.584.9%18%Low trailing price to earnings. High dividend.
IAMGOLD Corp.IAG$4.765.7%32%Price to book value 0.49.
Infosys, Ltd.INFY$54.131.5%24%An A+ rated stock at a bargain price. Recently beat analyst income estimates.
Universal Corp.UVV$52.203.9%34%High dividend and return on equity. Low trailing price to earnings ratio.
USA Mobility, Inc.USMO$14.993.4%46%Hihg dividend. Very low debt.

One can gradually acquire a portfolio of such stocks. They may then either be held for long-term capital appreciation and income or sold when up 100% or after held for two years, whichever first. If held long-term, it is still well to monitor the assets and sell any for which the dividend payout rises significantly. Whenever assets are redeemed from the portfolio, it is important that replacement dividend stock purchases also have low dividend payout ratios.

The stocks in the table each have value analysis aspects in their favor, for instance low price to earnings, a recently positive earnings surprise, relatively high dividend rate, or low price to book value. Their average dividend and dividend payout ratio are 3.6% and 28%, respectively. Thus the overall yield is above average while the risk of the dividends being cut is relatively low.

Happily, in general such assets tend to provide better overall total returns yet less risk of loss of principal than is the case for the S&P 500 Index. While there are no guarantees, and one should always do his or her own due diligence (or rely on a trusted financial advisor), these stocks offer in my view good prospects for total returns that will double one's investment in the next 3-5 years.


Larry is not a professional. Don't take him seriously!

Actually, the investment article provided here is for general information only and should not be considered as professional advice, a solicitation to buy or sell any security, or the Word of God. Investors are encouraged to do their own research while considering their personal goals and circumstances, or consult their own professional financial advisors, before making investment decisions. Neither Larry nor LARVALBUG will be liable for any losses sustained by any visitor to this site.

(Disclosure statement: Larry and Val have holdings in some of the suggested assets but do not "make a market" in any of them and do not derive any direct benefit from recommending them, except perhaps for a bit of smug self-satisfaction.)

Value Investing / Main Index / previous / next