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Today, I want to look at the group of companies known as dividend challengers. These companies have been able to increase their dividends for a time frame of anywhere between 5-9 years. For these companies, the stability of dividends is a fantastic asset to their overall values.

The more fear creeps its way into the market; the more I want to look at some solid income producing stocks with strong cash flows. In my previous article on S&P Dividend Champions I explained why I think cash flows are a stronger indication of a dividend issuers' strength than income statements are. These companies also have some of the lowest price-to-owners earnings ratios of any on the list.

Some key metrics that I am focusing on:

  • Debt to Equity: The debt-to-equity ratio is a leverage ratio indicating the relative proportion of shareholders' equity and debt used to finance a company's assets. It reveals how a company has financed its assets. A low debt-to-equity ratio indicates lower risk because shareholders have claims on a larger portion of the company's assets. I normally look for a number below 60%. However, if they have large amounts
  • Dividend Yield: The dividend yield is the sum of a company's annual dividends per share divided by the current price per share.
  • FCF Payout Ratio: This ratio is the company’s current dividend per share (ttm) divided by its free cash flow per share. It gives the investor a clearer picture of the company’s ability to cover its dividend than the more traditional payout ratio. This is because free cash flow is much a harder metric for a company to manipulate, as opposed to net income. I look for a ratio in the neighborhood of 70% or lower.
  • Price to Owner's Earnings: This ratio looks at the relationship between the share price of the company and the free cash flow per share. I normally look for a multiple somewhere between 15 -20.
  • Consecutive Years Increasing Dividends: One of the best ways to see how strong a dividend that a company has is to look at how consistently they issue and increase their payouts. All dividend champions have been increasing for 25+ years.
  • 5 Year Average Annual Growth Rate: This is the average speed at which the dividend has grown during the previous 5 years. It helps us get an idea about how important the dividend is in the eyes of the company’s management.

TransAlta Corporation (NYSE:TAC): TransAlta Corporation operates as a non-regulated electricity generation and energy marketing company. The company engages in the production and sale of electric energy through its diversified portfolio of facilities fuelled by coal, natural gas, hydroelectric, wind, geothermal, and biomass resources in Canada, the United States, and Australia.

  • Yield = 5.30%
  • FCF per Share = 2.163
  • FCF Payout Ratio = 54.5%
  • Years Increasing Dividends = 5 years
  • Price-to-Owner's Earnings = 10.32
  • 5-Year Average Annual Growth Rate = 5%
  • Debt-to-Equity Ratio = 117.71

Reynolds American Inc (NYSE:RAI): Reynolds American Inc. through its subsidiaries, manufactures and sells cigarette and other tobacco products in the United States.

  • Yield= 5.70%
  • FCF per Share = 2.831
  • FCF Payout Ratio = 74.9%
  • Years Increasing Dividends = 7 years
  • Price-to-Owner's Earnings = 12.82
  • 5-Year Average Annual Growth Rate = 11.9%
  • Debt-to-Equity Ratio = 55.92

The Travelers Companies (NYSE:TRV): Travlers through its subsidiaries, provides various commercial and personal property and casualty insurance products and services to businesses, government units, associations, and individuals primarily in the United States.

  • Yield= 3.30%
  • FCF per Share = 14.639
  • FCF Payout Ratio = 11.2%
  • Years Increasing Dividends = 7 years
  • Price-to-Owner's Earnings = 3.366
  • 5-Year Average Annual Growth Rate = 9.2%
  • Debt-to-Equity Ratio = 26.41

Verizon Communications (NYSE:VZ): Verizon provides communication services. The company operates through two segments, Domestic Wireless and Wireline. The Domestic Wireless segment offers wireless voice and data services; and sells equipment in the United States. The Wireline segment provides voice, Internet access, broadband video and data, Internet protocol network, network access, long distance, and other services in the United States and internationally.

  • Yield= 5.40%
  • FCF per Share = 2.375
  • FCF Payout Ratio = 84.2%
  • Years Increasing Dividends = 6 years
  • Price-to-Owner's Earnings = 15.53
  • 5-Year Average Annual Growth Rate = 3.6%
  • Debt-to-Equity Ratio = 59.51

Waste Management (NYSE:WM): Waste Management, through its subsidiaries, provides waste management services to residential, commercial, industrial, and municipal customers in North America. It offers collection, transfer, recycling, and disposal services.

  • Yield= 4.20%
  • FCF per Share = 2.040
  • FCF Payout Ratio = 66.6%
  • Years Increasing Dividends = 8 years
  • Price-to-Owner's Earnings = 15.867
  • 5-Year Average Annual Growth Rate = 9.5%
  • Debt-to-Equity Ratio = 136.78

Strayer Education (NASDAQ:STRA): Strayer through its subsidiary, Strayer University, provides post-secondary education services for working adults. It offers various academic programs in traditional classrooms and through the Internet.

  • Yield= 4.90%
  • FCF per Share = 9.466
  • FCF Payout Ratio = 50.4%
  • Years Increasing Dividends = 7 years
  • Price-to-Owner's Earnings = 7.938
  • 5-Year Average Annual Growth Rate = 39.51%
  • Debt-to-Equity Ratio = 299.74

Royal Dutch Shell (NYSE:RDS.A): Royal Dutch Shell operates as an oil and gas company worldwide. The company explores for, and extracts crude oil and natural gas. It also converts natural gas to liquids to provide cleaner-burning fuels; markets and trades natural gas and power; extracts bitumen from mined oil sands and convert it to synthetic crude oil; and develops wind power to generate electricity. plc operates as an oil and gas company worldwide. The company explores for, and extracts crude oil and natural gas. It also converts natural gas to liquids to provide cleaner-burning fuels; markets and trades natural gas and power; extracts bitumen from mined oil sands and convert it to synthetic crude oil; and develops wind power to generate electricity.

  • Yield= 5.30%
  • FCF per Share = 3.352
  • FCF Payout Ratio = 18.68%
  • Years Increasing Dividends = 5 years
  • Price-to-Owner's Earnings = 18.583
  • 5-Year Average Annual Growth Rate = 24.8%
  • Debt-to-Equity Ratio = 25.40

Lockheed Martin (NYSE:LMT): Lockheed Martin Corporation engages in the research, design, development, manufacture, integration, operation, and sustainment of advanced technology systems and products in the areas of defense, space, intelligence, homeland security, and government information technology in the United States and internationally.

  • Yield= 5.40%
  • FCF per Share = 2.347
  • FCF Payout Ratio = 51.6%
  • Years Increasing Dividends = 8 years
  • Price-to-Owner's Earnings = 9.36
  • 5-Year Average Annual Growth Rate = 21.05%
  • Debt-to-Equity Ratio = 153.01


*This list of companies does not constitute a recommendation to buy. It is simply looking at some of the highest yielding dividend challengers that also possess attractive price-to-owners earnings ratios.


Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: 8 Dividend Challengers With Solid Cash-Flow Metrics