When the market is unhappy, as it appears to be now, investors can earn a smile on their faces by relying on good-ol' regular payouts in the form of dividends. A steady stream of dividend income helps to weather the market's gyrations.
For this reason, I just screened for stocks with dividend yields of at least 5%, but not more than 7%, thinking very high yields may indicate a company on a shaky financial footing. One company unlikely to leave egg on an investor's face is Cal-Maine Foods (CALM), the country's largest producer and marketer of shell eggs. Responsible for 23% of domestic egg production, the company markets its products under such brands as Egg-land's Best and Land O'Lakes.
Joel Greenblatt is an investment guru whose strategy I automated years ago and have followed ever since. My Greenblatt-based strategy gives Cal-Maine very high marks. This strategy is unusual because it relies on just two variables: earnings yield, which is the return on investor could expect to earn if buying the entire business, including debt; and return on total capital, an indicator of how well a company uses the capital it employs. Companies are ranked from among all the thousands of companies in our database by each variable and then a combined ranking is calculated. Cal-Maine, whose dividend yield is 5%, is ranked No. 4 among all stocks. You do not have to feel you are walking on egg shells when investing in this company.
Another company with a solid dividend and strong financials is PacWest Bancorp (PACW). A bank holding company, it has over $21 billion in assets and operates under the banner of Pacific Western Bank, with 80 full-service branches in California and one in Durham, N.C.
PacWest, whose dividend yield is 6.4%, earns the support of my Peter Lynch-based strategy, whose most important variable is the P/E/G ratio, a measure of how much the investor is paying for growth given today's stock price. A P/E/G of up to 1.0 is acceptable, and below 0.50 is considered very strong, which is where we find PacWest -- with its P/E/G of 0.48. Also in PacWest's favor is its equity-to-assets ratio of 21%, way above the Lynch strategy's 5% minimum.
Financially solid with good dividend yields, both companies are well suited to today's turbulent market.