Dividend Champions Update: Rise of the Contenders

by: David Fish

Last month, I began work on adding companies that trade as ADRs (American Depository Receipts) and had long enough streaks to be included among the Contenders. To qualify, the streak must be in US dollars. The only addition at that time was ACE Limited (NYSE:ACE), an insurance company incorporated in Switzerland, which declares (and raises) its dividend in US dollars and then translates it back into its home currency. This month, I thoroughly tested listings of Canadian and International dividend “achievers,” which typically means having at least five straight years of dividend increases, but that may be in their home currencies. Few companies made the cut, and many were tripped up by lower 2009 payouts, which may have been related to the fact that many foreign companies adjust their dividend to earnings, which declined in the recent recession, as well as the effect of currency translation.

Added to the Contenders roster were two Bermuda-based insurance companies, PartnerRe Ltd. (NYSE:PRE) and RenaissanceRe Holding (NYSE:RNR), which, like ACE (which was formerly based in Bermuda, declare dividends in US dollars. (The “Re” in their names stands for Reinsurance.) Also joining the Contenders were two Canadian oil and gas companies, Enbridge (NYSE:ENB) and Imperial Oil (NYSEMKT:IMO). Their payouts fluctuate with the currency rates, but the Canadian dollar is close to “parity” with our own, so they managed to qualify. It will be necessary to review the quarterly dividends at the end of the year in order to insure that the 2010 total exceeds what they paid in 2009, in US dollars. A third Canadian company, Canadian National Railway (NYSE:CNI), came close at 14 years, and has been added to the new Challengers tab.

Introducing the Dividend Challengers

"Challengers' is my new category for companies that have paid higher dividends for 5-14 years. These companies are obviously working their way toward Contender status and, hopefully, many will eventually become Dividend Champions. For some months, I had been accumulating a list of companies that had 12-14 years of increases, so I believe that the group in that range is fairly complete. More recently, I've begun adding names of companies with at least five years of higher dividends, and although the Challengers already total more than 100, I suspect that there are more companies to be added. As I mentioned in Comments on Seeking Alpha, I'm not certain yet how practical it will be to keep track of this expanding “universe” effectively, only time will tell.

In building the list of Challengers (which I initially called Pretenders!), I also uncovered two small banking companies that had long enough streaks to be added to the Contenders tab. They are Ohio Valley Bank Corp. (NASDAQ:OVBC) and Southside Bancshares (NASDAQ:SBSI) at 15 and 16 years, respectively.

Rise of the Contenders (and Challengers)

The importance of the Contenders and Challengers is obvious. This is the breeding ground for future Dividend Champions. But beyond that, there is some logic to the notion that these companies may have even more promise than the Champions themselves. Since they haven't increased their payouts for as long a stretch as the Champions, it would seem reasonable to believe that they have more dividend-raising potential ahead of them and, after all, it is with an eye to the future that we choose investments. Add to that notion the simple fact that so many of them are familiar names and large-cap companies that have considerable resources, and you have a field of great promise. On the Contenders list, we see such familiar names as Avon Products (NYSE:AVP), Caterpillar (NYSE:CAT), Chevron (NYSE:CVX), General Dynamics (NYSE:GD), International Business Machines (NYSE:IBM), McCormick & Co. (NYSE:MKC), Travelers Companies (NYSE:TRV), and United Technologies (NYSE:UTX). On the Challengers list are still more, including Best Buy (NYSE:BBY), Church & Dwight (NYSE:CHD), CVS Caremark (NYSE:CVS), Deere & Company (NYSE:DE), General Mills (NYSE:GIS), H.J. Heinz (HNZ), Intel (NASDAQ:INTC), Kellogg (NYSE:K), Norfolk Southern (NYSE:NSC), TJX Companies (NYSE:TJX), and Yum! Brands (NYSE:YUM). Is it any wonder that the future of dividend-raising companies looks so bright?

Naturally, there will be some attrition that will reduce these listings, primarily when companies run into trouble and must freeze or reduce their dividends. But I believe that we have just come through the worst of the recent bear market and recessionary influence. The ongoing promise of the Contenders and Challengers is impressive, and should continue to “restock” the Champions list. They also offer a degree of “new blood” in terms of industry strength. For example, the two “junior” lists include many MLPs (Master Limited Partnerships), high-tech firms, and small caps, as well as “younger” industrials and food companies, and I think we can expect to see a continuing influx of corporations that are globally diverse and forward-thinking. The proof will be in their ability to grow earnings and dividends many years into the future.

Disclosure: Author long AVP, CAT, TRV, UTX, CVS, DE, INTC,YUM

To download the latest version of the US Dividend Champions spreadsheet or PDF, go here.