There are many lists of dividend companies such as S&P 500 Dividend Aristocrats, US Broad Dividend Achievers™ Index and The U.S. Dividend Champions. They all have one thing in common - trying to narrow the population to the very best dividend companies. When combined, as I did with the Stock Ideas list, this is a large and daunting list of 319 unique companies. So, how do we find the Elite companies on this list?
In an effort to narrow down the list, I considered what criteria makes an Elite Dividend company. Here is what I came up with (financial data from morningstar.com):
A Long Track Record Of Consecutive Dividend Increases: Aristocrats and Champions have increased their dividends for 25 consecutive years, while Achievers have done so for 10 years. The quickest way to narrow the list down was only include companies with 35 or more years of consecutive dividend increases. This reduced the population to 65 companies.
Ability To Generate Positive Free Cash Flows: To have cash available for dividends, a company must have cash left over after paying the operating expenses and normal capital expenditures. For this I looked for companies that had positive free cash flow for the last 10 years.
Free Cash Flow Sufficient To Pay The Dividend: Free cash flow can be positive, but still not enough to cover an increasing dividend. To ensure adequate coverage, I screened for companies with a 60% or less Free Cash Flow payout ratio.
Low Debt: Dividends paid out of Free Cash Flow must compete for other needs of the business such as interest and debt payments. Lower debt and interest requirements provide more cash for dividend payments. For this item, I eliminated all companies that had a debt to total capital percent in excess of 35%.
Low Risk: An Elite Dividend company will provide you a superior return without subjecting your investment to undue risk. My usual measure of risk indirectly incorporates the stock’s current valuation. I wanted this list to be valuation independent (e.g. a great stock could be on the list, but not be a buy because it is overvalued). For this measure I opted to use S&P’s Qualitative Risk Assessment.
