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This article is part of a regular series in which I focus 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. As I have shown on my site, 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. However, I consider the method detailed below, which combines Dividend Champions with 2 simple ranking tools, one of the most effective ways to filter for high quality dividend paying stocks.

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.

I ran this screen last month and many of the same names remain. 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 potential winners with staying power in a portfolio.

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. This month's list has 98 stocks, so the top 33 yielding stocks was my starting point. I then ranked the remaining 33 based on payout ratio. The 10 results are below:

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 11/30/10.

Ticker

Company

Retirement Portfolios

Sector

Dividend Yield

Payout Ratio

UVV

Universal Corp.

Here

Consumer Goods

5.08%

33.77%

JNJ

Johnson & Johnson

Here

Healthcare

3.47%

41.71%

T

AT&T, Inc.

Here

Technology

5.94%

47.03%

SYY

Sysco Corp.

Here

Services

3.56%

51.13%

SON

Sonoco Products Co.

Here

Consumer Goods

3.41%

51.72%

CINF

Cincinnati Financial Corp.

Here

Financial

5.22%

52.02%

PNY

Piedmont Natural Gas Co. Inc.

Here

Utilities

3.97%

54.22%

CLX

Clorox Corporation

Here

Conglomerates

3.54%

55.81%

ABT

Abbott Laboratories

Here

Healthcare

3.75%

56.29%

MGEE

MGE Energy Inc.

Here

Utilities

3.62%

57.84%

KMB

Kimberly-Clark Corporation

Here

Consumer Goods

4.25%

57.84%

Disclosure: No positions

Source: 11 High Yield Dividend Champions With Staying Power