Best dividend paying stocks

Here are ideas about how to pick the best dividend paying stocks. My friend, an analyst specialized to fundamental ideas, provided them or you.

When trying to assess and quantify which stocks out there in the developed world are the best dividend-paying stock, one has to look at multiple criteria, as value is always a reflection of multiple
inputs.

Let me provide for a brief and simple methodology that takes into account the most meaningful factors of value. Applying this methodology, I will put on my quant hat and build a stocks screener.

Parameters for ideal dividend paying stocks

1. Dividend yield – looking for dividend-paying stocks, we will naturally start with a dividend yield. In order to draw a line somewhere, we decided to select an arbitrary 6% threshold. Also, we look for stocks that have been delivering such dividend yield for the past 24 months. In order to give some room for dividend raising stock, we set a threshold of 5% for the preceding year.
2. Sustainability of such dividend is another crucial measure. We want to make sure that operating dividends paid out are less that operating cash flow of the company. It may look a bit rich, but this step filters out some of the bad apples.
3. Market cap of at least USD 500M .
4. No 52-week low apples. As we have time and capability constraints to do a detailed analysis of each candidate, we have to implement some technical boundaries, such as positive total return over the past 12 months and at least 5% distance from 52-week lows. Doing this, one puts some faith into market signaling.
5. As return comes not only from dividends, but also from capital appreciation, we provide for our results in two different rankings. First, we order results by absolute dividend yield. Second, we add analyst expectations to the dividend yield to get an expected 12 month total return.

Here are some results generated by such screener this week (14.7.2011):

This best dividend paying stocks screener was produced by Bloomberg terminal, but similar results could also be found by free stock screener available on the FinViz website.

Another viable approach, which we think is much more sensible than following the pure dividend yield, is to look at the total shareholder yield, or direct return of funds to shareholder (equivalent of dividend yield and buybacks together). If this return to shareholder is lower than free cash flow to the firm generated by the company, then we would be bit cautious.

Overall, you can see that some companies are clearly returning money to shareholder in excess of dividends and that is the biggest reason why I love US multinationals so much and a lot of these companies are in my list of best dividend paying stocks that I update from time to time in my Global Macro research notes