Finding Safe, Growing Dividends
Dividends are back, sort of.
Following two of the worst years ever for dividend cuts and omissions, 2010 is shaping up as a comeback year. In the three months ended March, dividend increases were up 41% from the same period in 2009, according to Standard & Poor’s. While the number of dividend increases was still 33% below 2008 levels, the trend is improving.
How can dividend investors improve their odds of finding stocks with both safe, growing dividends and rising share prices? One strategy is by combining our Quadrix® stock-rating system with the Big, Safe Dividends (BSD) rating system introduced in contributing editor Chuck Carlson’s book, The Little Book of Big Dividends.
The BSD rating system uses 10 factors to evaluate dividend stability and growth potential, including:
Payout ratio. A stock’s payout ratio measures the percentage of dividends paid out of profits. The lower the payout ratio, the more cushion a firm has to grow the dividend.
Interest coverage. A company can’t get rid of interest payments unless it repays debt. But a company can get rid of the dividend. Interest coverage measures how well the company’s profits cover its interest obligations.
Long-term expected profit growth. A company’s ability to increase the dividend over time depends in large part on its ability to increase profits.
Three-year dividend growth. Companies with a history of dividend hikes tend to keep up the trend.
The combination of Quadrix Overall scores and the BSD rating is effective for identifying stocks that outperform, based on a study of S&P 1500 Index stocks going back to 1995. For the study, we created a portfolio of all dividend-paying stocks in the index with BSD scores of at least 80 and Overall scores of at least 75 at the beginning of each calendar year. Here are two key takeaways:
• On average, our portfolio outperformed the index by more than six percentage points per year.
• The strategy did an excellent job of avoiding dividend cuts and omissions. For example, nearly one out of every 10 companies reporting dividend information to Standard & Poor’s cut or omitted its dividend in 2008. However, only two of the 120 stocks in our portfolio cut their dividends during the year.
The table below lists 18 attractive total-return plays with safe and growing dividends. All 18 earn BSD scores of at least 80 and Overall scores of at least 75. If you’d like to check out Quadrix Overall and BSD scores for all dividend-paying stocks in the S&P 1500 Index, visit www.DowTheory.com/go/BSD.