The Best Dividend Track Records

by: Alex Rasmussen

This is perhaps the worst time to recommend a dividend strategy. Investors have been consistently transitioning into dividend paying large caps over the past two-three years. This, however, does not necessarily indicate that a contrarian strategy is called for. A balanced equity portfolio should always look to have some dividend income.

There are only a few positions I have held because I believe so strongly in their ability to realize future value. One is Contango (MCF), with a unique business model and approach to natural gas - working with an extremely low-cost model and a shareholders dream in CEO Ken Peak, also the largest shareholder. Another is Gravity (GRVY), a South-Korean game developer that is selling near its cash balance, yet has had 10 years of positive free cash flow. It just realized a sequel to its most popular game and yet the stock continues to be in the hands of traders looking for a quick buck.

Both of these have concrete catalysts and investment theses, and they both have limited downside. Investments like this are getting harder to find with good quality large caps being overvalued from the Christmas Rally, and on the other end of the spectrum, rock bottom valuation 'junk' equities being driven up year to date. For those (like me) who are still looking for some returns, a dividend strategy is preferable to fixed income investments.

I started by using to screen for companies with

  1. Forward yield between 4% and 6.5%
  2. Market cap of 10B or greater
  3. Minimum 10 years of dividend increases (more specifically 10 years without a decrease)

I did this to weed out unsustainable dividend yields (as well as those that are sub-par), get the 'safety' of looking only at large caps, and required 10 years of dividend increases. There are only 20 companies that pass this screen and they are already winners. This being said, more analysis is needed to separate ones that have been good investments, and those that will be.

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Based on this analysis the best of the best with regards to quality of dividend history are Paychex (PAYX) and Waste Management (WM). It has a dividend per share CAGR of 11.79% and 9.19% over the past 10 years, beating the average of the group at 7.52%. It also doesn't sacrifice consistency, having both increased dividends 100% of the years it has been paying them. For Paychex, that's 21 years and for Waste Management that's 13 years. Neither of their payout ratios are too high, though it is pushing it with 84% of earnings being paid out as dividends. In addition, neither of them have any red flags on two primary valuation metrics (P/B and P/E).

BHP Billiton (BHP) also looks interesting though I'm not sure about the forward yield given in that table. I believe it's closer to 3%. They are growing their dividend at an incredible rate and are actually quite undervalued. This reflects concerns in the market for iron ore, though BHP is more diversified than it's competitors (RIO) and (VALE).

These truly are the 20 large caps with the best dividend track records.

Disclosure: I am long GRVY, MCF.