Sunday, August 26, 2012

5 Criteria for 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.

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