NEW YORK (TheStreet) -- Of the many great companies in the market, we've selected the five highest dividend yields among the undervalued companies reviewed by ModernGraham. Each company has been determined to be suitable for enterprising investor.
According to our system, defensive investors are not able or willing to do substantial research into individual investments, and therefore need to select only the companies that present the least amount of risk. Enterprising investors, on the other hand, are able to do substantial research and can select companies that present a moderate, though still low, amount of risk. Each company suitable for the defensive investor is also suitable for enterprising investors.
Value investors seeking to follow Benjamin Graham's methods may also wish to review "5 Undervalued Dow Components" while proceeding with further research.
Here are our top five dividend stocks:
With a dividend yield of 5.15%, HCP for now qualifies for the enterprising investor, which is a rather rare achievement for a real estate investment trust. Normally the level of debt present eliminates REITs from contention. In this case, though, the company's current assets are high enough this quarter to push it into contention for investment. For the defensive investor, the company's price-to-earnings mg ratio is too high and the current ratio is not high enough to overcome that burden. But enterprising investors following Benjamin Graham's methods should feel comfortable proceeding with further research into the company.
From a valuation standpoint, the company appears to be undervalued, having grown its EPSmg (normalized earnings) from 57 cents in 2009 to $1.54 for 2013. This demonstrated level of growth is above the market's implied estimate of 9.48% earnings growth, and the ModernGraham valuation model has returned an estimate of intrinsic value that is higher than the market price.
HCP data by YCharts
People's United Financial has a dividend yield of 4.63% and is suitable for enterprising investors but not for defensive investors. The defensive investor is concerned with the high PEmg ratio, but the company passes all of the requirements for the enterprising investor. As a result, enterprising investors following the ModernGraham approach based on Benjamin Graham's methods should feel comfortable proceeding with further research into the company and comparing the company to other opportunities.
As for a valuation, the company appears undervalued after growing its EPSmg (normalized earnings) from a 34 cents in 2010 to an estimated 71 cents for 2014. This level of demonstrated growth surpasses the market's implied estimate of 5.79% earnings growth and leads the ModernGraham valuation model to return an estimate of intrinsic value that is well above the price at this time.
FreePort-McMoran is an interesting company in the ModernGraham valuation model and has a dividend yield of 3.57%. It does not pass the requirements of the defensive investor as it has not consistently paid dividends over the last 10 years and it has not shown earnings stability over the last 10 years. But it does pass the requirements of the enterprising investor, though it has a higher level of debt relative to current assets than the investor type likes to see. As a result, enterprising investors should feel comfortable proceeding with their research.
From a valuation perspective, the ModernGraham valuation is affected significantly by the large earnings loss in 2008, which has caused the EPSmg (normalized earnings) figure for 2009 to be very low in relation to 2013. As it stands, the EPSmg have grown from a loss of $1.67 to a earnings of $3.48, indicating a high level of growth that would appear to significantly outpace the market's implied estimate of 0.79% earnings growth. This has led the model to return an intrinsic value estimate that is well above the market price, and the overall result that the company is undervalued is supported by the valuation based on only 3% growth.
4. Coach (COH)
Coach has a strong dividend yield at 3.22% and is a very intriguing company for enterprising investors, having passed all five of the investor type's requirements. The company does not quite qualify for the defensive investor due to the short dividend history and the high price-to-book ratio. As a result, enterprising investors should feel very comfortable proceeding with further research into the company.
From a valuation perspective, the company looks significantly undervalued after having grown its EPSmg (normalized earnings) from $2.03 in 2010 to an estimated $3.19 for 2014. This demonstrated level of growth outpaces the market's implied estimate of 2.31% earnings growth, and leads the ModernGraham valuation model to return an estimate of intrinsic value that is well above the market price.
COH data by YCharts
Ford has a dividend yield of 3.14% but remains unsuitable for the defensive investor due to its lack of stability in earnings and dividends over the 10 year period. The enterprising investor looks at a much shorter time horizon, though, and the company passes all of the requirements of this investor type. As a result, enterprising investors seeking to follow the ModernGraham approach based on Benjamin Graham's methods will feel comfortable proceeding with further research.
As for a valuation, the company performs well in the ModernGraham valuation model after growing its EPSmg (normalized earnings) from a loss of $3.60 in 2008 to earnings of $2.23 for 2013. This solid level of growth is not reflected by the market, as the market is currently implying a growth rate estimate of -0.82%. In other words, the market price indicates an expectation that the company's EPSmg will shrink by 0.68% annually over the next 7 to 10 years. Clearly this assumption is not supported by the historical achievements of the company, and the ModernGraham valuation model accordingly returns an intrinsic value estimate that exceeds the market price.
What do you think? Are these companies a good value for Enterprising Investors? Is there a company you like better? Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.
At the time of publication, the author held a long position in Coach and Ford, but held no other positions in any of the otherstocks mentioned.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.