Magic Formula’s top ten high-yield dividend stocks

Recently, MagicDiligence – a site dedicated to finding investment opportunities using Joel Greenblatt’s Magic Formula investing stock strategy – compiled a list of the top ten Magic Formula dividend stocks, sorted by dividend yield.

The strategy, as detailed in Greenblatt’s “The Little Book That Beats the Market” tries to identify good businesses selling at bargain prices by looking at “earnings yield” and return on capital.

While the jury’s still out on how well this approach works, I’m always interested in checking out new potential dividend stock investing opportunities. So here’s my quick take on the ten dividend stocks mentioned (the stars represent Dividendinvestor.com’s star ranking system – three stars are five years of consecutive dividend increases, four stars are ten, and five stars are 20):

Primedia (PRM: 3.30 -0.90%, yld: 8.41%) (0 stars) – The shares of this publisher and distributor of consumer real estate guides are currently trading at about $2.00 and yielding 14%. They appear somewhat undervalued by some valuation measures and overvalued by others. Any company in the publishing business has to be viewed skeptically these days and this one is no exception. That, the low-single-digit price and the company’s negative book value are more than enough to keep me away.

Deluxe Corp. (DLX: 17.76 -3.58%, yld: 5.43%) (0 stars) – Trading at $8 and yielding 12.5%, the shares of this printer of checks and business forms appear undervalued here by most measures. While the payout ratio and cash flow look good with respect to the dividend, a high level of debt and questions about the long-term business model are more than enough to keep me away.

Gevity HR (GVHR: 0.00 0.00%, yld: N/A%) (0 stars) – This provider of payroll, insurance, and human resource (HR) outsourcing services has seen its stock drop from $30 down to as low as $1 per share recently. Currently trading at almost $4 and yielding over 5%, the shares by comparison with some of its historical valuation ratios are undervalued. Based on its prior year’s earnings, the fair value of the stock calculates to about $5 – but earnings estimates going forward for 2009/10 are significantly lower, which could certainly affect the dividend (and stock price). This might make for an interesting longer-term growth/value speculation, but I’m going to pass it by.

USA Mobility (USMO: 14.99 -1.51%, yld: 6.57%) (0 stars) – Currently trading at about $10 and yielding 10%, the shares of this provider of wireless messaging and information services are difficult to value due to a short and erratic operating history. I’m staying away, at least for now.

Knoll Inc. (KNL: 13.87 -1.63%, yld: 0.57%) (0 stars) – Currently trading at about $6 and yielding almost 8%, the shares of this designer and maker of office furniture appear undervalued by most valuation measures. And the dividend appears sustainable based on the payout ratio and free cash flow. I’d be very tempted except for what appears to be a high debt to equity ratio – at least given the current economic environment. Still, I’ll probably keep an eye on KNL.

Meredith Corp. (MDP: 31.76 -1.37%, yld: 2.84%) (****) – The shares of this media and marketing company appear somewhat undervalued here at about $15 and yielding 6%. The company has a good dividend history and just recently increased its dividend by about 5%. The big question remains about the future business model of companies in media and publishing. That’s enough to keep me away.

Cal-Maine Foods (CALM: 30.02 -0.10%, yld: 3.15%) (0 stars) – Currently trading at about $21 and yielding 7.4%, the shares of this shell egg producer and distributor appear to be about fairly valued to somewhat undervalued, depending on the valuation measure used. The company’s earnings are obviously dependent on the price of eggs (a commodity) and its dividend can be variable. Still, this is something I wouldn’t mind owning below $20. The stock was as low as $6 in 2006, so it can swing around.

Mesabi Trust (MSB: 29.00 -0.21%, yld: 5.83%) (0 stars) – The units of this iron ore U.S. royalty trust are currently trading at about $6.5 and have a five-year average distribution yield of 5.7% (according to Investopedia). The earnings of this trust are dependent on the price of iron ore and can fluctuate significantly – as can the distribution. In comparison with some historical valuation ratios MSB may be undervalued. From a price standpoint, it’s trading below its long-term linear regression trendline, but not dramatically. I don’t see enough to induce me in.

Innophos Holdings (IPHS: 30.60 -2.89%, yld: 2.16%) (0 stars) – Currently trading at $9 and yielding 7.6%, the shares of this specialty phosphates producer appear undervalued here, although there’s not a great deal of earnings and price history to evaluate. And what there is is highly variable. Still, it looks potentially interesting and something I might investigate further.

Garmin (GRMN: 27.77 -2.22%, yld: 7.93%) (0 stars) – The shares of this maker of GPS navigation products are down almost 70% from their 52-week highs and appear somewhat undervalued here at about $20 and yielding almost 4%, even based on the lowest earnings estimates looking out over the next couple of years. The big question is what happens after that as the company reacts to increasing competition from, among other things, GPS-enabled cellphones. As far as the company’s dividend history, it’s too short to be meaningful. This potentially interesting investment in the technology sector is one I’ll be keeping an eye on for now.