Looking for Dividend Stocks with Buffett’s Criteria

Nilus Mattive

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 …

UNIVERSAL INSURANCE UVE Property & Casualty Ins. 4.3 8.5 64.8 26.0
MESABI TRUST MSB Steel 14.6 7.0 1341.6 97.4
TERRA NITROGEN TNH Fertilizers & Agricultural Chem. 9.2 7.0 110.7 35.7
UNILENS VISION UVIC Health Care Supplies 9.5 5.1 27.1 39.6
CHEROKEE CHKE Apparel 18.5 4.7 66.8 42.0
LORILLARD LO Tobacco 14.7 4.7 145.1 40.3
TECHNICAL COMMUNICATIONS TCCO Communications Equipment 2.4 4.7 28.5 49.8
BRIDGE BANCORP BDGE Regional Banks 14.3 4.4 16.1 25.2
EASTERN AMERICAN NAT. GAS NGT Oil & Gas Exploration & Prod. 25.0 4.3 48.9 70.1
MICROCHIP TECHNOLOGY MCHP Semiconductors 16.2 4.2 21.2 31.0
CTC MEDIA INC CTCM Broadcasting 22.7 4.2 20.6 36.1
MERCHANTS BANCSHARES MBVT Regional Banks 11.0 4.2 15.4 28.0
PAYCHEX PAYX Data Processing 21.2 4.1 35.4 38.0
ARROW FINANCIAL AROW Regional Banks 12.5 4.1 15.3 30.4
INTEL INTC Semiconductors 10.2 3.7 16.1 36.8
JOHNSON & JOHNSON JNJ Pharmaceuticals 13.6 3.3 24.3 27.5
SOUTHSIDE BANCSHARES SBSI Regional Banks 9.6 3.3 18.4 28.7
WESTAMERICA WABC Regional Banks 15.6 3.0 21.1 46.5
S.Y. BANCORP SYBT Regional Banks 13.9 3.0 15.5 26.7
AXIS CAPITAL HOLDINGS AXS Property & Casualty Ins. 5.2 2.9 16.9 25.2
STRAYER EDUCATION STRA Education Services 14.0 2.9 48.4 34.1
U.S. GLOBAL INVESTORS GROW Asset Management 17.8 2.8 32.3 24.3
AUTOMATIC DATA PROCESSING ADP Data Processing 21.0 2.7 27.3 20.9
ERIE INDEMNITY ERIE Property & Casualty Insurance 26.3 2.7 25.8 20.4
ANALOG DEVICES ADI Semiconductors 11.8 2.7 17.9 32.7
MOCON MOCO Electronic Equipment  18.7 2.3 15.5 20.5
MICROSOFT MSFT Systems Software 10.2 2.3 40.5 40.0
CKX LANDS CKX Real Estate Operating Co. 29.0 2.1 18.2 77.8
T. ROWE PRICE TROW Asset Management 18.2 2.1 21.2 45.1
RLI RLI Property & Casualty Ins. 10.3 1.9 16.0 30.6
BUCKLE BKE Apparel Retail 14.9 1.7 29.9 22.6
CASS INFORMATION SYS. CASS Data Processing 16.4 1.7 17.2 29.0
OCCIDENTAL PETROLEUM. OXY Integrated Oil & Gas 12.8 1.7 20.5 39.7
CBOE HOLDINGS CBOE Specialized Finance 20.4 1.7 42.5 37.7
COMPUTER SERVICES CSVI Data Processing 18.5 1.6 23.9 24.2
TEXAS INSTRUMENTS TXN Semiconductors 13.5 1.6 22.9 32.6

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 Mattive
Money and Markets

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