Tuesday, August 21, 2012

The Elite Dividend Stocks

As investors in Dividend Growth Stocks, we want to limit our purchases to only the very best stocks. Our first step is to look at published lists of dividend companies such as S&P 500 Dividend Aristocrats, US Broad Dividend Achievers™ Index and The U.S. Dividend Champions.

These lists are used to narrow the population of all publicly traded companies down to the very best dividend stocks. When these lists are combined, as I did with the Stock Ideas list, it is still a large and daunting collection of over 200 unique companies. So, how do we find the Elite companies on this list?

In 2009, I devised additional criteria to apply to the Stock Ideas list in an effort to eliminate all but the Elite Dividend Stocks. Here is the additional criteria that I came up with, along with the companies that met the criteria:

I. A Long Track Record Of Consecutive Dividend Increases
Aristocrats and Champions have increased their dividends for 25 consecutive years, while Achievers have done so for 10 years. The quickest way to narrow the list down was only include companies with 35 or more years of consecutive dividend increases. This reduced the number of companies to 65.

II. Ability To Generate Positive Free Cash Flows
To have cash available for dividends, a company must have cash left over after paying the operating expenses and normal capital expenditures. For this I looked for companies that had positive free cash flow for the last 10 years.

III. Free Cash Flow Sufficient To Pay The Dividend
Free cash flow can be positive, but still not enough to cover an increasing dividend. To ensure adequate coverage, I screened for companies with a 60% or less Free Cash Flow payout ratio.

IV. Low Debt
Dividends paid out of Free Cash Flow must compete for other needs of the business such as interest and debt payments. Lower debt and interest requirements make available more cash for dividend payments. For this item, I eliminated all companies that had a debt to total capital percent in excess of 35%.

V. Low Risk
An Elite Dividend company should provide a superior return without subjecting your investment to undue risk. For this item, I limited the companies to those with a risk # less than 1.5.

My list that started with 226 companies, then after considering all the above and eliminating companies with a yield less than 2.5%, I was left with the following Elite Dividends companies:

3M Co. (MMM) is a diversified global company that provides enhanced product functionality in electronics, health care, industrial, consumer, office, telecommunications, safety & security and other markets. The company has paid a cash dividend to shareholders every year since 1916 and has increased its dividend payments for 54 consecutive years. Yield: 2.6%

Automatic Data Processing Inc. (ADP), one of the world's largest independent computing services companies, provides a broad range of data processing services. The company has paid a cash dividend to shareholders every year since 1974 and has increased its dividend payments for 36 consecutive years. Yield: 2.8%

Walgreen Co. (WAG) is the largest U.S. retail drug chain in terms of revenues, this company operates more than 8,000 drug stores throughout the U.S. and Puerto Rico. The company has paid a cash dividend to shareholders every year since 1933 and has increased its dividend payments for 37 consecutive years. Yield: 3.0%

Genuine Parts Co. (GPC) is a leading wholesale distributor of automotive replacement parts, industrial parts and supplies, and office products. The company has paid a cash dividend to shareholders every year since 1948 and has increased its dividend payments for 56 consecutive years. Yield: 3.1%

Johnson & Johnson (JNJ) is a leader in the pharmaceutical, medical device and consumer products industries. The company has paid a cash dividend to shareholders every year since 1944 and has increased its dividend payments for 50 consecutive years. Yield: 3.6%

This is not a buy list. The Elite Dividend List ignores valuation and other factors you must consider before purchasing one of these companies. As we build our dividend growth portfolios, it only makes sense to build its core with the very best stocks.

Full Disclosure: Long MMM, ADP, WAG, GPC, JNJ. See a list of all my dividend growth holdings here.

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