5 Predictable, Cash-Rich Dividend Stocks to Buy

There is a short cut to identifying companies that might be great bargains. The key input is free cash flow (FCF), so start there. The more cash a business generates, the more it’s worth. So we can screen for companies with high FCF as a percentage of market cap — I like to call it free cash flow yield. It works just like dividend yield –simply replace dividend distributions with free cash flows. For the purposes of making picks for my premium newsletter, High-Yield Investing, any FCF yield above 12% automatically gets my attention. That means the company could pay out just half what it pockets and still support a yield three times the market average. No scrounging or borrowing to barely meet payments. This high FCF yield is often the result of a depressed market cap — which is another way of saying the stock is cheap relative to the cash being produced.

I see real value in DCP Midstream LP (NYSE:DCP), which owns 60 natural gas processing plants and 64,000 miles of pipelines. DCP is the nation’s leading producer of natural gas liquids (NGLs), which has been a tough business lately as prices for products like ethane have crumbled. But management has restructured so that just 20% of the firm’s cash flows will be sensitive to commodity prices next year — 80% will be either hedged or fee-based in nature. The others: Valero Energy Corporation (VLO), Target Corporation (TGT), Pitney Bowes Inc. (PBI) and RR Donnelley & Sons Co. (RRD).

Source: InvestorPlace

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