Looking for Dividend Stocks with Buffett’s Criteria

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.”

[Editor’s note: To hear Nilus talk about his favorite dividend superstars right now, just click here.]

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 …

NAME	SYMBOL	INDUSTRY	P/E	IND. YIELD	ROE	PROFIT MARGIN
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

P.S. After some more investigating of my own, I did just recommend one of the companies above to my Income Superstars subscribers. If you’d like to learn which stock it was — and get the details on 16 more dividend superstars that I like right now — just click here to watch my latest presentation.