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This is my third article this week focusing on the US Dividend Champions, a list compiled and tracked at DRIP Investing. The list is comprised of stocks which have increased their dividend payout for at least 25 consecutive years. There are several ways to invest and this strategy is but just one in what I believe should be a "basket" of strategies from which to allocate a portfolio.
Some studies have shown that the, highest yielding, low payout stocks perform better over time than stocks with higher payouts and lower yields. I originally cited a Credit Suisse study on the S&P 500 here and to summarize they found that from 1990-2006:

Below [chart availabe in paper], we show cumulative return obtained in our back test of each dividend yield and payout ratio portfolios. We find that companies with low payout ratios tended to perform better than companies with high or negative payout ratios. Portfolios of companies with high dividend yields and low payout ratios have the best returns.

Clearly, past performance is not a guarantee of future returns. The study cited above also did not focus just on Dividend Champions but rather the entire S&P 500. However, if an investor is seeking to narrow the list of potential candidates to a more manageable list, I think the Dividend Champions list is a great starting point. If we were to focus on the entire universe of stocks when searching for yield and low payout ratios, we may find several qualifying stocks that have not or will not continue to increase or even pay dividends. The stocks on the Dividend Champions list have the added advantage of a strong tradition of raising dividends. By applying the same principles which have been successful on larger and a less selective universe of stocks to Dividend Champions, I believe we can find potential investments.
By simplifying our search for equity income and looking for stocks with a history of increasing dividends and paying investors a healthy yield without eating up a large percentage of earnings to do so, we can find these potential winners.
The method used to generate this list was to first take the top third of Dividend Champions based on yield and then sort this list based on the top third with the lowest payout ratio. The 10 results are below:

Ticker Company Industry Trend Dividend Yield Payout Ratio Performance (Half Year) Performance (Year) Price
UVV Universal Corp. Tobacco Products, Other Here 4.49% 33.77% -15.96% -0.49% 42.8
JNJ Johnson & Johnson Drug Manufacturers - Major Here 3.38% 44.35% * 0.72% 8.06% 63.95
T AT&T, Inc. Telecom Services - Domestic Here 5.78% 47.03% 16.48% 17.33% 29.05
SYY Sysco Corp. Food Wholesale Here 3.46% 49.57% -4.50% 10.02% 28.87
SON Sonoco Products Co. Paper & Paper Products Here 3.38% 51.72% 1.81% 23.88% 33.15
CINF Cincinnati Financial Corp. Property & Casualty Insurance Here 5.28% 52.02% 12.35% 22.04% 30.29
PNY Piedmont Natural Gas Co. Inc. Gas Utilities Here 3.80% 54.22% 10.53% 33.02% 29.49
CLX Clorox Corporation Conglomerates Here 3.49% 55.81% 0.61% 7.29% 63
KMB Kimberly-Clark Corporation Personal Products Here 4.27% 56.29% * 1.58% 0.28% 61.86
GPC Genuine Parts Company Auto Parts Wholesale Here 3.45% 56.55% 15.38% 34.68% 47.5
Note: Data source for this screen Finviz and screen the stocks based on yield and payout on a real-time basis. However, another option is to use the free spreadsheet provided by DRIP updated on 10/29/10. Payout ratios for 2 stocks (indicated by *) on the list obtaining from DRIP because data was incomplete from Finviz.
Disclosure: No positions
Source: Highest Yield, Low Payout Dividend Champion Stocks