The 10 most profitable dividend paying shares

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ROCE in this context is in fact the 10-year median net ROCE, where net ROCE is ROCE calculated using post-tax profits rather than operating profits. Doing it that way means that interest payments are factored into the result, so companies with large debt and interest obligations typically have lower net ROCE scores.

Selection criteria

Every one of those 10 companies has a 10-year unbroken record of dividend payments and has produced a 10-year net profit as well (i.e. total profits were more than total losses). But it is possible to be far more selective.

Excluding expensive shares

Generally I don't like to invest in anything where PE10 (share price to 10-year average earnings ratio) is greater than 30. In the table you can see the stocks that fall above that level as their PE10 value is highlighted in bright red.

So using that criterion Micro Focus International, Next, Telecom Plus, Domino's Pizza UK & IRL and Rotork would be considered too expensive, regardless of how quickly they were growing (the Growth column) or how high the consistency or quality of their growth was (the Quality column).

Where PE10 is coloured light red (or pink) its value is less than 30 but higher than the market average, i.e. the FTSE 100, which currently has a PE10 ratio of 15.

So most of these stocks are more “expensive" than the market, but that's reasonable and to be expected because, quantitatively at least, they are all “better" than average companies. In other words they have all grown faster and more consistently than the market as a whole (any value in the stock screen table which is better than the FTSE 100 equivalent is coloured green).

Focusing on the cheapest, most profitable dividend paying shares

From this group of highly profitable dividend paying shares, Admiral stands out.

It has a dividend yield of 6.5%, including the “special" dividend which the company has paid out every year since it listed on the stock exchange. It has grown at almost 13% a year, with 87.5% consistency and has no borrowings.

It also has a ROCE figure of 53.73% in the table, although as it's an insurance company that figure is actually for return on equity (ROE), because ROE makes more sense than ROCE due to the structure of insurance company balance sheets.

Admiral does “cheat" slightly in that its amazing profitability is driven to a large extent by a heavy reliance on reinsurance (taking out insurance on a proportion of the risks the company has insured) and coinsurance (sharing risks with other insurers). However, as far as I can see it still appears to be a well run business.

The other relatively “cheap" companies are De La Rue and PayPoint, although as ever with “cheap" companies, there are always problems to consider.

In De La Rue's case, the dividend has recently been almost halved, while PayPoint may have to pay an additional £1m to £2m in VAT, which will negatively impact its current adjusted post-tax profits, which are about £35 million.

While I cannot say which of these stocks will do well in the future, I can say that each of these businesses has produced exceptionally high returns on the capital employed within their businesses.

In many cases it's likely that those outstanding results were driven by some sort of sustainable competitive advantage, which is exactly the sort of thing sensible investors should look for.