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INTRODUCTION

While preparing for another article, I was reading some investment literature from Goldman Sachs regarding dividends. They have a series of funds whose foundations are dividend based with the purpose of providing growth and income. Goldman Sachs states the following regarding dividends:

"…[w]e believe that rising dividend history is an important measure of a company's financial health and that companies that not only pay, but consistently grow their dividend, perform better across full market cycles."

Dividend paying companies that are considered for inclusion in their funds must meet their 10x10 test. Here is what they say regarding this test:

"Our proprietary 10x10 test is designed to identify companies that have increased their dividend by 10% on average for 10 years in a row. The result is a focus on quality companies with sound balance sheets, strong earnings growth potential, and a commitment to paying shareholders."

I was curious first of all to see what companies are included in their fund and whether there are other companies that meet this criterion. This criterion is something that dividend investors may consider when evaluating a certain company for inclusion in their portfolio. If a company has a 10 year history of increasing dividends, their dividend policy is taking root and shows a good track record. Several dividend investors here on Seeking Alpha won't even consider companies with less than 10 years of consistent dividend increases to ensure that the company is serious about their dividend policy. A growth rate of 10% of more for 10 years is certainly desirable, particularly if this growth is coupled with a dividend yield that is generally above 2%. Generally speaking, many dividend investors prefer dividend yields above 2% to beat inflation as well as to obtain some income.

METHODOLODY

The Top 25 holdings for the Goldman Sachs Rising Dividend Fund (MUTF:GSRAX) were obtained from Morningstar.com. I was unable to obtain a complete list of all the holdings in this fund. I also downloaded David Fish's Dividend Champion, Contender and Challenger (CCCs) spreadsheets to filter for additional stocks that meet the 10x10 criterion. The spreadsheets can be obtained here. The years considered for the 10 years of dividend increases are 2003-2012.

ANALYSIS

The following table presents the Top 25 holdings in the GSRAX. For informational purposes, the column "No. Years" indicates the number of years that the company has increased dividends (according to David Fish's spreadsheets or via Gurufocus.com or Morningstar.com where companies failed to increase the dividend), "10x10" means where the company conforms to the criterion and "No. Years not Met" indicates the number of years that the company had grown the dividend less than 10%.

Table 1: Top 25 holdings of the GSRAX Fund

Ticker

Company

No. Years

Dividend Yield

10x10

No. Years not Met

PAA

Plains All American Pipeline LP

13

4.01

No

7

MCD

McDonald's Corporation

36

3.02

No

1

EPD

Enterprise Products Partners LP

16

4.42

No

10

PX

Praxair, Inc.

20

2.10

No

1

NSRGY.PK

Nestle SA ADR

13

3.06

No

4

IBM

International Business Machines Corp

18

1.88

No

1

NVO

Novo Nordisk A/S ADR

13

1.80

Yes

-

LINE

Linn Energy LLC

3

8.27

No

4

CAH

Cardinal Health Inc

17

2.49

No

2

ROP

Roper Industries, Inc.

20

0.55

No

2

TEVA

Teva Pharmaceutical Industries Ltd ADR

13

2.70

Yes

-

CNI

Canadian National Railway Co

16

1.53

No

2

TJX

TJX Companies

17

1.19

Yes

-

VOD

Vodafone Group PLC ADR

14

5.29

No

5

VFC

VF Corporation

40

1.95

No

7

BEN

Franklin Resources Inc.

32

0.75

No

3

MKC

McCormick & Company, Inc.

27

1.89

No

4

MSA

Mine Safety Appliances

41

2.33

No

4

ROST

Ross Stores, Inc.

19

1.03

Yes

-

HCC

HCC Insurance Holdings Inc.

16

1.55

No

4

ADP

Automatic Data Processing

38

2.58

No

4

OKS

ONEOK Partners, L.P.

8

5.29

No

7

PII

Polaris Industries, Inc.

18

1.95

No

3

GWW

W.W. Grainger, Inc.

42

1.51

No

2

CHD

Church & Dwight Company, Inc.

17

1.75

No

4

TROW

T. Rowe Price Group

26

2.10

No

6

DHR

Danaher Corporation

4

0.16

No

3

HRL

Hormel Foods Corporation

47

1.65

No

5

GEL

Genesis Energy LP

10

4.14

No

3

ECL

Ecolab, Inc.

21

1.09

No

3

SHW

Sherwin-Williams Company

35

1.09

No

6

FDO

Family Dollar Stores, Inc.

37

1.69

No

3

RGLD

Royal Gold, Inc.

12

1.44

No

1

EOG

EOG Resources

14

0.62

No

3

MON

Monsanto Company

12

1.40

No

3

MMP

Magellan Midstream Partners, L.P.

13

3.83

No

5

EPB

El Paso Pipeline Partners LP

6

5.79

No

6

ETE

Energy Transfer Equity LP

8

4.40

No

8

WES

Western Gas Partners, LP

6

3.57

No

6

SXL

Sunoco Logistics Partners

12

3.69

No

3

RNF

Rentech Nitrogen Partners LP

0

9.72

No

-

WPZ

Williams Partners LP

9

6.20

No

7

VAL

Valspar Corporation

35

1.44

No

4

FDS

FactSet Research Systems, Inc.

14

1.32

Yes

-

MWE

MarkWest Energy Partners LP

2

4.86

No

3

PH

Parker Hannifin Corporation

57

2.03

No

4

HRS

Harris Corporation

11

3.20

Yes

-

Out of the Top 25 holdings, only 6 (24%) conform to the 10x10 criterion. Furthermore, there are a total of 9 (36%) companies who do not conform to the required 10 years in a row of dividend increases. The average dividend yield for these holdings is 2.77%.

It appears as though the fund manager of GSRAX favours MLP's as there are several held in this fund but they do not meet either of the 10x10 criteria. There are other surprising inclusions in this fund such as Linn Energy LLC (NASDAQ:LINE). It began paying a dividend in 2006. It increased its dividend for 2 years thereafter, froze the dividend and then began increasing the dividend again in 2010 at a growth rate less than 10%. This seems to me to be a stock that should be outside the mandate of this fund and also seems to be a speculative income growth attempt.

Some of these companies have grown their dividends very well. Take for instance W.W. Grainger, Inc. (NYSE:GWW). Although GWW does not meet the 10x10 criterion, in reality, the latter two years (2004-2003) of dividend growth is what excludes it at the moment. Excluding these two years, the average annual dividend growth is above 15% making this an attractive stock to consider nonetheless.

I applied the same 10x10 criterion to all the CCCs in David Fish's spreadsheets. The following is a list of companies from those spreadsheets that meet the 10x10 criterion (see Table 2)

Table 2: Stocks from the CCC spreadsheets that meet the 10x10 criterion

Ticker

Company

No. Years

Dividend Yield

LMT

Lockheed Martin

10

4.64

HRS

Harris Corp.

11

3.20

ROL

Rollins Inc.

11

1.48

CASY

Casey's General Stores Inc.

13

1.14

NVO

Novo Nordisk A/S

13

1.80

TEVA

Teva Pharmaceutical Industries

13

2.70

FDS

Factset Research System Inc.

14

1.32

OMI

Owens & Minor Inc.

16

2.95

TJX

TJX Companies Inc.

17

1.19

JW.A

John Wiley & Sons Inc.

19

2.52

ROST

Ross Stores Inc.

19

1.03

SYK

Stryker Corp.

20

1.62

WAG

Walgreen Company

37

2.22

WMT

Wal-Mart Stores Inc.

39

2.42

I should point out that the 6 companies that actually meet the 10x10 criteria in the GSRAX fund are also found in this table. These companies are Harris Corp. (NYSE:HRS), Novo Nordisk A/S (NYSE:NVO), Teva Pharmaceutical Industries (NYSE:TEVA), Factset Research System Inc. (NYSE:FDS), TJX Companies Inc. (NYSE:TJX), and Ross Stores Inc. (NASDAQ:ROST).

From the CCCs, I have identified 14 companies that meet the 10x10 criterion. The average yield of these stocks is 2.14%, which is lower than the GSRAX fund presently however, I am certain that you would not build a fund with only 14 companies. The other companies that the GSRAX fund does not include (but should) are Lockheed Martin (NYSE:LMT), Rollins Inc. (NYSE:ROL), Casey's General Stores Inc. (NASDAQ:CASY), Owens & Minor Inc (NYSE:OMI), John Wiley & Sons Inc (NYSE:JW.A), Stryker Corp. (NYSE:SYK), Walgreen Company (NYSE:WAG) and Wal-Mart Stores Inc. (NYSE:WMT). The average annual dividend growth for these 14 companies is 24.8%. Companies like LMT (25.2%), SYK (34.7%), ROL (23.7%), and WAG (21.3%) have had impressive average annual dividend growth.

In case you are wondering, here is a list of companies who, if they increase their dividend by 10% in 2013, could meet the 10x10 criterion (see Table 3).

Table 3: Stocks from the CCC spreadsheets that could qualify as a 10x10 in 2013

Ticker

Company

No. Years

Dividend Yield

BDX

Becton Dickinson & Co.

41

2.10

TGT

Target Corp.

45

2.04

ARG

Airgas Inc.

10

1.66

ATRI

Atrion Corp.

10

1.12

PB

Prosperity Bancshares

14

1.87

IBM

International Business Machines

18

1.88

ROP

Roper Industries Inc.

20

0.55

The 7 companies that could meet the 10x10 criterion in 2013 include Becton Dickinson & Co. (NYSE:BDX), Target Corp. (NYSE:TGT), Airgas Inc. (NYSE:ARG), Atrion Corp. (NASDAQ:ATRI), Prosperity Bancshares (NYSE:PB), International Business Machines (NYSE:IBM), and Roper Industries Inc. (NYSE:ROP). These 7 companies have an average dividend yield of 1.60%, and if combined with the other 14, would average 2.05%. Of the 7 companies identified in Table 3, 5 have dividend yields below 2% and even ROP is below 1%.

CONCLUSION

The GSRAX is meant to be a fund that focuses on quality companies that pay a consistent dividend. In this analysis, I have found that the fund does not meet its foundational selection criterion. Goldman Sachs claims the 10x10 criterion is proprietary therefore I will assume that there are other criteria that were not published in order to guard against others replicating their methods. However, based on what they have published, only 24% of the fund meets the foundational selection criterion. Just seeing these findings, reinforces my own personal sentiment regarding why I decided to begin investing on my own.

For dividend investors interested in the consistent growth aspect of dividend paying companies, this exercise has yielded 21 companies to initiate further research. 14 of these companies currently grow their dividend over 10% per year and have done it for 10 years in a row. There are an additional 7 companies that could be added to that list if they also raise their dividends by 10% in 2013.

Are all of the companies included in the GSRAX fund far from the mark? Not at all! Take McDonald's (NYSE:MCD) which is on the list and only missed the 10x10 criterion by one year. In 2008 MCD raised its dividend by 8.2%. Over the 10 year period (2003-2012), MCD raised its dividend an average of 29.9%. You really can't go wrong with this stock for this reason.

For investors seeking growth, the 10x10 criterion provides an idea of companies who are consistently growing the dividend over a long period of time. Several of these stocks however have dividend yields below 2% which does limit the amount that an investor is getting in return and may not keep up with inflation when that begins to be a serious factor again in the future.

One of the important issues to consider regarding the company's dividend growth at or above 10% is whether this is sustainable. Earnings will need to match this growth in some way in order for the company to continue this streak without their payout ratios reaching levels where investors shy away from. Some of the companies included here such as WAG, HRS and WMT have actually had 10% dividend growth for longer than 10 years. The increase in dividends has been said to be a proxy of earnings and financial health. If that is true (and for some companies it is), then these 14 companies (and possibly 7 others) are doing well financially and could possibly continue this trend into the future.

Additional stocks included in this article but not yet mentioned: Parker Hannifin Corporation (NYSE:PH), MarkWest Energy Partners LP (NYSE:MWE), Valspar Corporation (NYSE:VAL), Williams Partners LP (NYSE:WPZ), Rentech Nitrogen Partners LP (NYSE:RNF), Sunoco Logistics Partners (NYSE:SXL), Western Gas Partners, LP (NYSE:WES), Energy Transfer Equity LP (NYSE:ETE), El Paso Pipeline Partners LP (NYSE:EPB), Magellan Midstream Partners, L.P. (NYSE:MMP), Monsanto Company (NYSE:MON), EOG Resources (NYSE:EOG), Royal Gold, Inc. (NASDAQ:RGLD), Family Dollar Stores, Inc. (NYSE:FDO), Sherwin-Williams Company (NYSE:SHW), Ecolab, Inc. (NYSE:ECL), Genesis Energy LP (NYSE:GEL), Hormel Foods Corporation (NYSE:HRL), Danaher Corporation (NYSE:DHR), T. Rowe Price Group (NASDAQ:TROW), Church & Dwight Company, Inc. (NYSE:CHD), Polaris Industries, Inc. (NYSE:PII), ONEOK Partners, L.P. (NYSE:OKS), Automatic Data Processing (NASDAQ:ADP), HCC Insurance Holdings Inc. (NYSE:HCC), Mine Safety Appliances (NYSE:MSA), McCormick & Company, Inc. (NYSE:MKC), Franklin Resources Inc. (NYSE:BEN), VF Corporation (NYSE:VFC), Vodafone Group PLC ADR (NASDAQ:VOD), Canadian National Railway Co (NYSE:CNI), Cardinal Health Inc (NYSE:CAH), Nestle SA ADR (OTCPK:NSRGY), Enterprise Products Partners LP (NYSE:EPD), Plains All American Pipeline LP (NYSE:PAA).

Source: The 10 x 10 Concept For Choosing Dividend Stocks