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Dividends are important in every investor's portfolio, no matter of size. In a study done by three professors from the London Business School, it has been proven that every $1 invested into U.S. stocks in 1900 would have grown to $198 by 2000. That sounds impressive, but if you had reinvested all the dividends, the portfolio would have grown to a whopping $16,797 by 2000. Although we will not live to invest for 100 years, this shows the importance of dividends on one's portfolio, especially for the long-term investor.

In this article, we will be screening the entire universe of stocks for quality high-dividend stocks with sustainable yields. Here are the criteria for today's screen:

1. Quality

  • > 30 Years Of Consecutive Dividend Increases

This criteria screens most of the stocks within the whole universe of stocks and is one of the most important criteria, in my opinion. With a market full of uncertainty, stocks that have increased their dividends consistently are rare, and are much more secure than holding other stocks. It is not really easy to get onto this list of stocks given that a company needs to have consistently growing profits and a strong business which is able withstand recessions or downturns in the economy.

2. High Dividends

  • Dividend Yield > 3%

In the introduction, I have shown the importance of dividends, therefore a company with a high dividend would work better in producing higher returns over the long run in an investor's portfolio.

3. Sustainable Yield

  • EPS Growth Past 5 Years > 5%
  • Payout Ratio < 60%

A yield does not just have to be high, it also has to be sustainable. The criteria that a company's EPS should have gone up at least 5% year-over-year for the past 5 years was set to confirm that a company's business is still strong and not starting to decline. 5% may seem like too low a number for some, but one has to keep in mind that these companies have a long history and most likely have matured businesses.

The next criteria (payout ratio < 60%) was included in the screen to further confirm that a company's dividends are sustainable. The definition of payout ratio is the amount of revenue given out as dividends. A company with too high a payout ratio indicates that it may not be able to support the dividend in the future, especially during recessions or downturns, which are inevitable. Many companies will have to depend on their cash reserves to further expand in those times.

All these measures were actually taken to ensure that a company's dividend is and will be sustainable, as firstly, an announcement of a decrease in dividend would most likely impact the price of the stock, in both the near-term and the long-term, mainly because investors' confidence will have been lost. Secondly, a stock with declining dividends after it has been increased yearly for 30 years or more would not be attractive to me anymore, as it would be evident that there are problems with the company or its business model.

Here are the products of today's screen:

Company Sector Yield Payout Ratio P/E Ratio EPS Growth Past 5 Yrs
American States Water Company (AWR) Utilities 3.23% 44.61% 17.61 10.79%
Emerson Electric Co. (EMR) Industrial Goods 3.30% 47.05% 14.77 7.86%
Genuine Parts Company (GPC) Services 3.16% 48.29% 15.72 5.40%
McDonald's Corp. (MCD) Services 3.55% 52.17% 16.35 18.13%

American States Water Company

Utilities are deemed to be more stable than other stocks. This is proven through the chart shown below. The company's monthly chart shows a more recession-proof stock which does not drop as much as other stocks. It had dropped from $40 to the sub-$30s, representing a loss of around 25%, when many other stocks had declined more than 50%. Other than the recession, the company has been on a nice long-term uptrend.

Its latest dividend increase had been a nice 27% in August this year, which also gives investors an idea of how stable the company is. Additionally, even after the dividend hike, its payout ratio is still not too high, at 44.61%. This, I feel, is a must have for any portfolio.


(Click to enlarge)

The American States Water Company provides water, electric, and contracted services. It engages in the purchase, production, and distribution of water in 75 communities in 10 counties in California; and provides electric service to the City of Big Bear Lake and surrounding areas in San Bernardino County, California.

The company also provides water and wastewater services, including the operation, maintenance, renewal, and replacement of the water and wastewater systems to various military installations. As of December 31, 2011, it served 255,935 water customers and 23,508 electric customers. The company was founded in 1929 and is headquartered in San Dimas, California.

Emerson Electric Company

I like the value presented in Emerson's stock at the moment. Attractively priced at only 14X trailing earnings, it is cheap compared to other stocks listed here and lower than competitor General Electric's (GE) P/E of 15.6. Its ROE of 22.67% is also higher than most stocks, which also shows that the company is making use of shareholders' investments well. The ROE (Return On Equity) is a measure of a company's profitability by revealing how much profit a company generates with the money shareholders have invested. A high ROE ensures that a company's management is making good use of shareholders' investments and not wasting it away. Besides its good value and its high ROE, it is also expected to grow at almost 10% year-over-year for the next 5 years, remarkable growth for a company with a market cap of $35B.

Another thing I like about the company, from a long-term investor's perspective, is its high consistency in share price, as shown in the daily chart below. Its 52-week range is between $43.25 and $52.98. Additionally, having increased its dividends for 55 years straight, this makes it a good candidate for a good anchor for one's portfolio.


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Emerson Electric Co. operates as a diversified technology company worldwide. It engages in designing and supplying products and technology, and delivering engineering services and solutions. The company's Process Management segment offers customers products and technology, and engineering and project management services. Its Industrial Automation segment provides integrated manufacturing solutions for products, and the company's Network Power segment designs, manufactures, installs, and maintains products like electric power conditioning, data centers, and other critical applications.

Its Climate Technologies segment offers products and services for the climate control industry, including residential heating and cooling products. The company's Tools and Storage segment provides a range of professional and DIY tools. Emerson Electric Co. operates primarily in the United States, Canada, Asia, Europe, Latin America, the Middle East, and Africa. The company was founded in 1890 and is headquartered in St. Louis, Missouri.

Genuine Parts Corp.

This dividend aristocrat had paid dividends since 1948 and had increased dividends for 55 consecutive years, with the most recent increase of 10% in February 2012. Its weekly chart also shows a stock which has given investors a good return over the past 8 years or so, appreciating 100% in value since 2005.

Additionally, its shares outstanding has decreased 10.7% since 2002, a good number, in my opinion, from 174.38M to 155.65M now. Although auto companies are cyclical stocks and deemed to be more risky, especially during recessions, the chart shown below shows a stock that does not decline as much as others during recessions.


(Click to enlarge)

Genuine Parts Company distributes automotive replacement parts, industrial replacement parts, office products, and electrical/electronic materials in the United States, Puerto Rico, Canada, and Mexico. The company's Automotive Parts Group segment distributes automotive replacement parts. This segment also distributes accessory items used in the automotive aftermarket. Its Industrial Parts Group segment distributes industrial replacement parts and related supplies, such as bearings mechanical and electrical power transmission,

The company's Office Products Group segment distributes computer supplies, imaging products, cleaning and break room supplies, and healthcare products to business product resellers and other products. Genuine Parts Company's Electrical/Electronic Materials Group segment distributes wire and cable, insulating and conductive materials, and other products in a variety of different markets. Genuine Parts Company was founded in 1928 and is headquartered in Atlanta, Georgia.

McDonald's Corp.

McDonald's is another classic, old, dividend-paying blue-chip. At first sight, one would most likely think of a company with little to no growth. On the contrary, McDonald's is still quite a fast-growing company, with its EPS growing 18.13% year-on-year for the past 5 years, and growing from just $0.77 in 2002 to $5.27 in 2011. Its EPS is also expected to grow 9.1% year-on-year for the next 5 years.

Besides this fast growth, it also has strong fundamentals, with its ROE increasing astronomically over the past 10 years, from a mere 8.70% in 2002 to 38.4% today, as stated here. McDonald's is also buying back shares, with shares outstanding declining 19.69% over the last 10 years, from 1.27B in 2002 to just 1.02B today.

McDonald's does not lose out on the technical aspect either, steadily rising more than 330% over the past 8 years. As seen from the chart below, during the 2008-2009 recession, when most stocks declined 50% or more, McDonald's stock price stayed between $40 and $55.This emphasizes its stability, how popular its brand is, and how it is a leader within its industry. This is a stock not to be left out of any investor's portfolio, especially on the recent dip. I am long McDonald's.


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McDonald's Corporation franchises and operates McDonald's restaurants in the global restaurant industry. Its restaurants offer various food items, soft drinks, coffee, and other beverages. The company operates approximately 33,500 local restaurants serving approximately 69 million people in 119 countries each day. McDonald's Corporation was founded in 1940 and is headquartered in Oak Brook, Illinois.

Risks

Due to today's low interest rates and bond returns, many investors are searching for another area to increase returns and that area, most likely, is high-yielding stocks. Therefore, the stocks with such qualities may be a little overvalued compared to other stocks in the market. A recession or a downturn that strikes may also affect these companies' profitability, especially the cyclical stocks.

The Takeaway

The stocks here are stable and suitable for holding long-term. As you will see in my disclosure below, I have long positions in many of these stocks and will most likely hold them long-term, not just for the dividends but also for their stability and other qualities listed in the article above. Even if this article seems like it has covered everything about the individual stocks, it has not (It would take four whole articles to write about them), therefore please still do your due diligence before investing in these stocks.

Source: 4 Quality High-Dividend Stocks With Sustainable Yields