NEW YORK ( TheStreet) -- Investors seeking long term gains should consider high-yield, low-beta companies with minimal debt such as AstraZeneca ( AZN), Fifth Street Finance ( FSC), Potash Corp. of Saskatchewan ( POT) and HollyFrontier ( HFC) that have proven to be the most rewarding holdings for extended periods.
Every aspect of a publicly traded company is a tell for investors.
But a high dividend yield combined with low beta and minimal debt show much more to investors than the others. The payment of a dividend is a show of strength. It demonstrates in the most meaningful way possible for investors that the funds dedicated to the dividend are not necessary for the firm to maximize shareholder value. A dividend that is above the average of about 1.9% for a member of the S&P 500 is even more of a positive indicator.
This can be found with AstraZeneca, a British drug maker with a dividend yield of 4.97%. HollyFrontier is an independent oil and gas refiner with a dividend gushing at 4.36% for its shareholders. The world's largest fertilizer company, Potash of Saskatchewan, is off due to a commodity slump, but still pays a dividend of 4.55%. Each of those firms has the cash flow to finance future dividend payments.
Fifth Street Finance, a business development company, has a dividend of more than 12%. High dividends are the norm in that industry, as covered in a recent article on The Street. Fifth Street Finance, now around $9.10 per share, is down in recent market action. However, the stock was rated a buy on Nov. 27 by UBS, with a target price of $10.50.
As detailed in another article on TheStreet, a study by Russell investments found that low beta stocks, those that move up and down in price less than the market as a whole, have the highest long term returns. With these, investors can enjoy high returns from low-risk stocks. For investors, there is no reason to sell an equity that is performing well; that leads to a lower beta. Buying and holding stocks that few owners choose to sell has proven to be a profitable strategy for investors with a long term horizon.
Along with a low beta, minimal debt is also an asset for higher long-term returns.
Too much debt is a drag on earnings. It limits a company's ability to seize opportunities. Debt also makes it difficult to reward investors with a healthy dividend yield. Outside creditors detract from the effective and efficient management of a company; they must be accounted for in many decisions and executive actions. That a company can grow without too much debt is a very bullish indicator.
The shareholders of AstraZeneca, Fifth Street Finance, HollyFrontier and Potash do not have that concern.
That means the average company required $1.38 in borrowing to create every dollar of equity. The debt-to-equity ratio for AstraZeneca is 0.45, about one-third the S&P average. For Fifth Street Finance, it is even lower at just 0.38. Still smaller is that for Potash at just 0.36. Finally, HollyFrontier has the lowest debt-to-equity ratio of this group, at 0.16.
Taken alone, any indicator can result in a disjointed analysis.
For example, a high-dividend yield might be the result of a stock price collapsing when investors flee the stock. If that were the case for an equity, than its beta should be high also from all of the selling. The debt-to-equity ratio would probably be up there too, with management borrowing to try to remedy the situation. Eventually, the board of directors would also cut the dividend to preserve capital.
Taken together, a high dividend with a low beta and little, if any, debt are useful tools for narrowing down which stocks should be the most rewarding for long-term investors.
At the time of publication, the author had no position in any of the stocks mentioned.
This article was written by an independent contributor, separate from TheStreet's regular news coverage.