16 High-Quality Dividend Stocks

by: Alan Brochstein, CFA

This article is the fifth time I have shared a screen (described below) that attempts to identify companies that pay relatively high and sustainable dividends, with an emphasis on dividend growth.

When I wrote the first article, I highlighted the stocks as being appropriate for those approaching or in early retirement. As I became negative on the market, I suggested that the companies that qualified might provide somewhat of a haven. While I have changed my stance on the direction of the market, I still find these types of companies attractive.

As I shared in March, November, July and last May, companies that are well-capitalized with a history of sustainable dividend growth may become increasingly in demand as aging baby boomers transition their accounts towards higher income generation and less speculative growth. Interest-rates are quite low now, leaving dividend paying stocks as a relatively attractive alternative. In fact, the S&P 500, which has a yield currently of 1.89%, is near the upper end of the range relative to the 10-year Treasury (the ratio is 49%).

While not as extreme as a few months ago given the rise in rates and the rise in equity prices that lowered the dividend yield, clearly stocks could absorb some continued competition from rising interest rates. To get to the 35 year median of .42, rates would have to rise to about 4.5%.


So, yields on the S&P 500 stocks in general are attractive, but can we do better? I continue to think that it makes sense to focus on companies that aren’t likely to cut their dividends despite the challenging economy. The screen that I continue to monitor (using StockVal) is designed to identify companies that pay sustainable and growing dividends that yield in excess of 2%. Specifically:

  • 2% minimum dividend yield (valuation)
  • 150% maximum of five-year median forward PE (valuation)
  • 5% minimum annualized revenue-per-share growth for the past three years (growth)
  • 5% minimum annualized earnings-per-share growth for the past three years (growth)
  • 5% minimum annualized dividend-per-share growth for the past three years (growth)
  • 10% minimum return on capital (safety)
  • 10% maximum decline in next year’s projected earnings over past twelve weeks (safety)
  • 35% maximum total debt to capital ratio (safety)
  • 10-year minimum history of dividend payments (safety)
  • 67% maximum payout of earnings (safety)

The current list includes 16 names:

8 of the 10 economic sectors are represented. While most of the companies tend to be relatively large, there are several names with market capitalization near or below $1 billion. Overall, the list sports a median PE of just 14X. Note that the current PE and P/S ratios are below the median for the past 5 years. On average, the stocks have fallen thus far in 2008, in line with the overall market. I bought Federated Investors (NYSE:FII) recently. It had passed the screen back in early March when I last published the list. What a great business – fat margins, large barriers to entry, consolidation. The whole group looks good to me. A better market but continued concerns over credit risk bode well for this part of the Financial sector. I don’t really know Illinois Tool Works (NYSE:ITW) well, but what a great run it has had – a 55-bagger since 1982. It has a terrific balance sheet, tons of exposure to foreign economies, quite a diversified customer base by end-market and a relatively decent valuation. As always, inclusion on this list is a signal to investigate, not necessarily to buy! If you don’t believe me, go back and look at the first article from last May. There were 32 names on that list, and the average and median returns since then were -1.8% and -0.3%, respectively, (before dividends), compared to the price return on the S&P 500 of about -5%. The top 5 names had prices returns in excess of 20% (ConocoPhillips (NYSE:COP), Chevron (NYSE:CVX), AMCOL (NYSE:ACO), Emerson Electric (NYSE:EMR) and Merck (NYSE:MCK)), while 6 names fell in excess of 20% (Limited Brands (LTD), Mattel (NASDAQ:MAT), Cato (NYSE:CTR), Home Depot (NYSE:HD), Watsco (NYSE:WSO) and Allstate (NYSE:ALL)).

Disclosure: Long FII