Sixteen Great Dividend Champions on Sale

My favorite list of quality dividend stocks that I use in my research is the list of dividend champions updated every month by David Fish. It is the most comprehensive list of US dividend growth stocks available. I also like David’s additional lists of the Contenders, while the Challengers provide another list of upcoming dividend growth stars. Without these lists, I would have been stuck in the dark days of following the Dividend Aristocrats and the Dividend Achievers indices, which exclude stocks based on stock market volume or the fact that they are not included in the S&P 1500 index.

I use the list to routinely scour the market for attractively valued stocks for further research. Every month, I run the following parameters:

1) At least 25 years of consecutive dividend increases

Only companies which have a solid business that generates extra cash flows are usually able to boost dividends for 25 years in a row. A company that cannot boost profitability will be unable to raise dividends over time. This does not ensure future success, but narrows the list for further research down significantly.

2) Price/Earnings ratio below 20

Even the best dividend stocks are not worth owning at any price. Investors who purchased Wal-Mart (WMT) in the year 2000 did not earn much in returns over the past 12 years, except for the dividend checks they cashed along the way. The business boomed since then, but because the price investors paid was expensive, stocks prices remained flat.

3) Dividend Yield above 2.50%

I like to purchase stocks that pay me at least a decent amount of dividend yield to hold on to their stock. If the dividend doubles over a decade for example, then the income I receive will be noticeable. If a company didn't pay a very high dividend and yielded only 1%, then dividends would have to increase substantially in order for me to generate a decent amount of dividend income. In addition, when stock prices fall in the next recession, a 2.50% yielder would provide a higher level of comfort than a 1% yielder.

4) Dividend Payout Ratio below 60%

I try to avoid companies paying more than 60% of earnings out in the form of dividends for safety. Earnings fluctuate every year, which is why a well-covered dividend can be sustained even in the event of a recession that leads to a temporary dip in profitability.

5) Ten year annual dividend growth rate above 6%

I usually look for a company that grows earnings and dividends at roughly the same percentages. The 6% dividend growth rate is slightly higher than the 5.50% dividend growth rate in the Dow Jones Index between 1920 – 2005 that I observed in this analysis. However, the premium is warranted because the companies I focus on have managed dividend policies.

The list I came up with, after applying the five criteria on the dividend champions group includes:

(The screen was run last week, and prices and information above reflect that)

I use this list only as a starting point for further research. Before investing your money in a business, you need to gain a very good understanding of it. One needs to understand how the business makes money and whether it has any competitive advantages such as recognizable brand names, which can translate into strong pricing power. In addition, investors also need to look at trends in revenues, earnings and dividends, and then try to assess whether profits can increase over time. A company that targets earnings growth should also be analyzed to see if it has a plan to achieve this.

Full Disclosure: Long AFL, APD, CLX, KO, MCD, PEP, SYY, WAG, WMT

Relevant Articles:

- Dividend Champions - The Best List for Dividend Investors
- Dow 370,000
- Strong Brands Grow Dividends
- Dividend Aristocrats List for 2012
- My Entry Criteria for Dividend Stocks