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In recent installments of the Smackdown series, I have screened the Dividend Champions (which can be found here) starting with the same factors that I used in the first two Smackdowns (back in mid-2010): Most Recent Percentage Increase (in November) and Yield (in December). This month, I'll start with a new column that I've titled Confidence Factor, which can be found in column BS. (No, it's just a coincidence, really!)

(Note that I have separated the Champions, Contenders, and Challengers into different articles. Champions are companies that have paid higher dividends for at least 25 straight years; Contenders have streaks of 10-24 years; Challengers have streaks of 5-9 years. I use the same Roman numeral for all three articles.)

The new Confidence Factor creates a “score” based on numerous data items, such as Dividend Growth Rates, Payout Ratio, Price/Earnings ratio, etc. The idea is to gauge the likelihood that dividend increases will continue and that they will do so with as much robustness as they have in the past. Some readers have already noted that there seems to be a “negative correlation” between the Confidence Factor and high yield. This appears to make sense because companies with persistently high yields tend to have higher payout ratios and lower dividend growth rates, both of which tend to lower their “score” in terms of potential above-average future percentage dividend increases. In this Smackdown, I hope to show that companies can still have decent-- if not high-- yields, even if they score highly for the Confidence Factor. So I screened as follows:

Step 1: After eliminating companies that had not increased their dividend in more than a year and those that had agreed to be acquired, I sorted by Confidence Factor, high to low. Eliminating companies that were below the Challengers average (68.2) cut the list to 46 companies.

Step 2: Sort the companies by Yield, high to low. I eliminated companies with yields of less than 2.5%. That cut the list to 18 candidates.

Step 3: Sort the companies by their 5-year Dividend Growth Rate, in order to eliminate any “historical stinginess” for dividend increases. I eliminated any company with a DGR of less than 8%. Meeting this threshold were all 18 companies from Step 2.

Step 4: Sort the companies by the Most Recent Increase, in order to eliminate more recent “stinginess” for dividend increases. Dropping those with increases of less than 8% cut the list to 14 companies.

Step 5: Sort the remaining companies by Estimated 5-year Earnings Per Share Growth. I intended to eliminate any that had rates below 8%, but only General Mills (at 7.7%) fell shy, so I decided to leave it on the list of finalists that appears below.

(Note that I've sorted all tables back into alphabetical order.)

No.

12/30

%

Est 5-yr

DGR

Conf.

Company

Symbol

Yrs

Price

Yield

Inc.

Growth

5-yr

Factor

Arch Coal Inc.

(NYSE:ACI)

8

14.51

3.03

10.00

36.6

14.3

77.0

Baxter International

(NYSE:BAX)

5

49.48

2.71

8.06

9.8

16.3

71.9

BHP Billiton Ltd.

(NYSE:BHP)

9

70.63

2.86

16.09

8.0

22.9

68.2

BHP Billiton plc

(NYSE:BBL)

9

58.39

3.46

16.09

8.0

22.9

68.3

Bob Evans Farms

(NASDAQ:BOBE)

6

33.54

2.98

25.00

9.8

11.6

73.0

CNOOC Ltd.

(NYSE:CEO)

6

174.68

3.67

21.60

10.3

17.8

68.3

Darden Restaurants

(NYSE:DRI)

7

45.58

3.77

34.38

12.4

28.4

75.4

General Mills

(NYSE:GIS)

8

40.41

3.02

8.93

7.7

11.1

71.0

Hasbro Inc.

(NASDAQ:HAS)

8

31.89

3.76

20.00

12.6

22.3

75.8

Intel Corp.

(NASDAQ:INTC)

8

24.25

3.46

15.89

11.0

14.4

73.2

Lockheed Martin

(NYSE:LMT)

9

80.90

4.94

33.33

9.0

21.1

70.3

Microsoft Corp.

(NASDAQ:MSFT)

7

25.96

3.08

25.00

9.8

12.9

69.3

Raytheon Company

(NYSE:RTN)

7

48.38

3.56

14.67

9.1

12.1

75.4

Safeway Inc.

(NYSE:SWY)

7

21.04

2.76

20.83

8.6

19.7

71.1

As an extra step, I'm including one of Chuck Carnevale's F.A.S.T. Graphs for the company that appears to be the most undervalued, as indicated by its price line being in the green-shaded earnings area, just below.

Click to enlarge

Conclusion

Since I started the Smackdown with the Confidence Factor, it was not a surprise that many of the final companies above were familiar names. As hoped, the yield levels do support the notion that you can get an excellent combination of yield, expected earnings and dividend growth. Note that BHP, BBL, and CEO are foreign firms, so tax implications and less frequent dividend payments should be taken into consideration. As always, please consider this no more than a starting point for more in-depth research.

Disclosure: I am long ACI, INTC, LMT, MSFT, RTN.

Source: Dividend Challengers Smackdown XXII