My screening process helps me narrow down the list of dividend champions to a more manageable level for further research. This of course is the first phase in company selection process; once the list is narrowed down to a more manageable level,
The screening criteria I used includes the following factors:
1) A dividend streak of annual dividend increases exceeding 25 years
This is understandable, since to be a dividend champion, a company needs to have increased dividends for at least 25 years in a row. I view a long streak of annual dividend increases as an indicator of business quality. After all, only a certain type of company can afford to grow the business, while also showering shareholders with more cash each year for over a quarter of a century. A long streak of dividend increases is a testament to a consistency in a business, strong competitive advantages, and an industry that quietly builds wealth to long-term shareholders over time.
2) A forward P/E ratio below 20
I want to remain disciplined, and focus on companies which are not overvalued. I do not want to overpay for future growth, as I also do not want to buy a cheap company that doesn’t grow either. To me valuation is important, because even the best company in the world may not be worth purchasing at an inflated price .If you overpay for a security, future returns could suffer, because you lock in a lower yield at the start.
3) A forward dividend payout ratio below 60%
I want to have a margin of safety in the dividend payment, which is what a lower dividend payout ratio helps to identify. I am after companies that reinvest a portion of earnings to grow the business and distributes the excess to shareholders. An adequate payout ratio provides a buffer in case there is some short term fluctuations in earnings.
4) Annual dividend growth exceeding 5% over the past five and ten years
Historical dividend growth has been around 5% - 6% on US stocks over the past 90 years. I wanted to find companies which consistently grow dividends, and do not materially decrease them over time. I also screened out companies whose last raise was less than 5%. Again, I value consistency in dividend growth.
5) A history of rising earnings per share over the past decade
Rising earnings per share are the fuel behind future dividend increases. There is a natural limit to dividend growth, if a company does not grow its bottom line. A company that grows earnings per share can afford to increase dividends, and reinvest more into the business. This also provides an additional margin of safety in the dividends, because a company has more tools within its disposal to tackle things such as a temporary high payout ratio. By growing earnings, a company can simply grow itself out of a higher payout ratio, as dividends grow slightly slower until the payout is normalized.
As a result of running this screen, I ended up with a list of the following dividend champions for further research:
Name
|
Symbol
|
Number
of Annual Dividend Increases
|
Last
Price
|
Annual Div Rate
|
Annual Div Yield
|
Dividend
Payout Ratio
|
Forward
P/E
|
5yr Dividend Growth
|
10yr
Dividend Growth
|
Most
Recent Increase
|
A.O.
Smith Corp.
|
AOS
|
25
|
45.25
|
0.88
|
1.94%
|
32%
|
16.70
|
27.00
|
19.94
|
22.22
|
BancFirst
Corp. OK
|
BANF
|
25
|
57.56
|
1.2
|
2.08%
|
32%
|
15.27
|
9.53
|
8.54
|
42.86
|
Carlisle
Companies
|
CSL
|
42
|
136.68
|
1.6
|
1.17%
|
22%
|
18.42
|
12.89
|
9.88
|
8.11
|
EV
|
38
|
41.93
|
1.4
|
3.34%
|
44%
|
13.31
|
9.31
|
7.78
|
12.90
|
|
Franklin
Electric Co.
|
FELE
|
27
|
45.8
|
0.58
|
1.27%
|
24%
|
19.08
|
8.92
|
6.57
|
20.83
|
General
Dynamics
|
GD
|
28
|
173.59
|
4.08
|
2.35%
|
35%
|
14.82
|
10.63
|
10.48
|
9.68
|
Genuine
Parts Co.
|
GPC
|
63
|
102.92
|
3.05
|
2.96%
|
51%
|
17.30
|
5.69
|
6.33
|
5.90
|
Gorman-Rupp
Company
|
GRC
|
46
|
30.66
|
0.54
|
1.76%
|
32%
|
18.04
|
9.10
|
7.14
|
8.00
|
W.W.
Grainger Inc.
|
GWW
|
48
|
271.87
|
5.76
|
2.12%
|
32%
|
15.10
|
8.35
|
13.21
|
5.88
|
ITW
|
44
|
149.21
|
4
|
2.68%
|
50%
|
18.72
|
16.45
|
11.25
|
28.21
|
|
Johnson
& Johnson
|
JNJ
|
57
|
140.23
|
3.8
|
2.71%
|
44%
|
16.34
|
6.45
|
7.03
|
5.56
|
LOW
|
56
|
99.31
|
2.2
|
2.22%
|
36%
|
16.39
|
21.22
|
18.36
|
17.07
|
|
MDT
|
41
|
97.96
|
2
|
2.04%
|
39%
|
19.02
|
12.20
|
11.88
|
8.70
|
|
McGrath
Rentcorp
|
MGRC
|
27
|
60.98
|
1.5
|
2.46%
|
44%
|
18.04
|
6.03
|
5.08
|
10.29
|
MMM
|
61
|
171.86
|
5.76
|
3.35%
|
55%
|
16.32
|
16.45
|
10.52
|
5.88
|
|
Parker-Hannifin
Corp.
|
PH
|
63
|
166.56
|
3.52
|
2.11%
|
30%
|
14.30
|
10.56
|
12.32
|
15.79
|
PPG
|
47
|
114.68
|
1.92
|
1.67%
|
31%
|
18.38
|
8.98
|
5.94
|
6.67
|
|
Stepan
Company
|
SCL
|
51
|
90.84
|
1
|
1.10%
|
20%
|
17.85
|
7.31
|
8.09
|
11.11
|
SEI
Investments Company
|
SEIC
|
28
|
54.34
|
0.66
|
1.21%
|
21%
|
17.53
|
11.38
|
14.87
|
10.00
|
1st
Source Corp.
|
SRCE
|
32
|
45.25
|
1.08
|
2.39%
|
31%
|
12.93
|
9.20
|
6.18
|
8.00
|
Stanley
Black & Decker
|
SWK
|
51
|
144.56
|
2.64
|
1.83%
|
31%
|
16.93
|
5.44
|
7.43
|
4.76
|
TROW
|
33
|
107.4
|
3.04
|
2.83%
|
44%
|
15.48
|
13.00
|
11.30
|
8.57
|
|
United
Technologies
|
UTX
|
25
|
126.62
|
2.94
|
2.32%
|
37%
|
16.01
|
5.25
|
7.74
|
5.00
|
WBA
|
43
|
52.8
|
1.76
|
3.33%
|
29%
|
8.64
|
7.32
|
15.01
|
10.00
|
I just wanted to caution you that this is not an automatic recommendation to buy or sell securities. I am not a financial advisor, just someone who writes about dividend investing. Any decision you make about investments is solely your responsibility. This means that each company needs to be analyzed in detail, both from a quantitative and qualitative standpoint. In addition, just because a company looks attractively valued today, that doesn’t mean that this company cannot get cheaper from here.
Furthermore, I am sharing a rudimentary process for screening the list of dividend champions on a regular basis, in order to show investors how I go about identifying companies, and build a diversified portfolio over time. I have found that the ability to stick to a process, invest regularly, and to keep holding through patiently thick or thin is my edge in investing. By sharing my experience, I am hopeful to inspire you into developing your own methodology, and use it to work towards your financial objectives.
Relevant Articles:
- How to determine if your dividends are safe
- 2019 Dividend Champions List
- Stagnant earnings create a risky environment for dividend investors
- Investing is part art, part science