The financial crisis has been tough not only for stock prices but also for dividends as well. Some former dividend darlings in the financial sector have seen their dividends being cut or eliminated after taking in billions in TARP aid due to severe losses from complex financial instruments. As a result the ratio of dividend increases to dividend cutters has been hovering at almost even for both. This means that so far in 2009, there is roughly one dividend cutter for every dividend raiser. Over the past 5 years this ratio has been more like 6 to 1 in favor of the dividend growers.

Due to the horrifying statistics of the overall bleak dividend picture, some reporters are claiming that dividend investing is dead. Just because you read it in the paper however, doesn’t mean it is true for everybody. While the overall statistics have been rather scary, the negative dividend news has been concentrated in the financial sector. Thus a well-diversified portfolio of income stocks should have performed well even during crisis.

Broad statistics on dividends could be misleading however as they focus on all companies, not just on the ones which have a proven track record of raising dividends. Even if the sky truly is falling down, there still are companies, which are generating enough cash flows and are confident enough in their business to increase distributions. In fact the dividend aristocrats index with its 52 components has seen 8 dividend cuts, one buyout and 32 dividend increases so far in 2009.

In addition to that, most dividend growth strategies tend to evaluate sustainability of dividends on a per issue basis, thus weeding out companies whose dividends are in peril. It really is a no brainer that a company, which generates enough earnings to cover dividend payments by a factor of 2 or 3, is much less likely to cut or eliminate distributions compared to a company, which pays out almost all of its cash flows out as dividends. This simple formula does exclude certain vehicles such as REITs for example, which are required to distribute almost all of their earnings as distributions to shareholders in order to maintain their tax status. Thus, these vehicles (such as REITs) should be evaluated using other criteria, which I would describe in a future post.

I have selected several prominent dividend growth stocks, whose earnings and cash flows provide adequate coverage for their dividends.

Symbol

Name

Industry

Dividend Yield

P/E

Dividend Payout Ratio

2008 EPS

Last Trade

. ABT Abbott Laboratories Health Care 3.6% 14.64 53% $3.03 $44.36 . ADM Archer-Daniels-Midland Consumer Staples 2% 10.52 21% $2.65 $27.87 . ADP Automatic Data Proc Information Technology 3.4% 14.63 50% $2.63 $38.48 . AFL AFLAC Inc Financials 2.7% 16.05 43% $2.62 $42.06 . APD Air Products & Chem Materials 2.4% 14.95 36% $4.97 $74.31 . BCR Bard (C.R.) Health Care 0.9% 18.13 17% $4.06 $73.62 . BDX Becton, Dickinson Health Care 2% 15.02 30% $4.42 $66.39 . CB Chubb Corp Financials 2.9% 9.91 28% $4.92 $48.76 . CLX Clorox Co Consumer Staples 3.5% 15.14 52% $3.81 $57.68 . DOV Dover Corp Industrials 3% 9.34 28% $3.67 $34.26 . EMR Emerson Electric Industrials 3.8% 11.32 42% $3.11 $35.19 . FDO Family Dollar Stores Consumer Discretionary 1.8% 17.68 33% $1.66 $29.35 . GWW Grainger (W.W.) Industrials 2.1% 14.36 30% $6.04 $86.71 . JNJ Johnson & Johnson Health Care 3.3% 13.15 43% $4.57 $60.08 . LOW Lowe's Cos Consumer Discretionary 1.6% 15.32 24% $1.49 $22.83 . MCD McDonald's Corp Consumer Discretionary 3.6% 14.7 53% $3.76 $55.27 . MHP McGraw-Hill Companies Consumer Discretionary 3.1% 11.39 36% $2.51 $28.6 . MMM 3M Co Industrials 2.9% 14.58 42% $4.89 $71.32 . NUE Nucor Corporation Basic Materials 3% 7.82 23% $5.98 $46.79 . PG Procter & Gamble Consumer Staples 3.4% 14.63 49% $3.58 $52.37

. SHW Sherwin-Williams Consumer Discretionary 2.3% 15.12 36% $4 $60.46 . SIAL Sigma-Aldrich Materials 1.1% 19.46 22% $2.65 $51.56 . STR Questar Corp Utilities 1.5% 8.64 13% $3.88 $33.53 . SWK Stanley Works Consumer Discretionary 3.2% 14.55 47% $2.82 $41.03 . TGT Target Corp Consumer Discretionary 1.6% 14.7 24% $2.86 $42.03 . VFC VF Corp Consumer Discretionary 3.6% 12.11 44% $5.42 $65.63 . WAG Walgreen Co Consumer Staples 1.7% 14.57 25% $2.17 $31.62 . WMT Wal-Mart Stores Consumer Staples 2.1% 15.46 33% $3.35 $51.79 . XOM Exxon Mobil Energy 2.5% 7.85 19% $8.69 $68.21 . . Average 2.57% 13.65 34.36% .

Investors should be cautioned that entry price does matter. Thus this list should only be considered as a starting point in the process of analyzing potential dividend stock candidates. Chances are that a dividend growth stock that manages to grow earnings is a likely candidate to continue growing distributions, which will increase yield on cost over time.

Full Disclosure: Long ABT, ADM, ADP, AFL, APD, CLX, EMR, FDO, GW, JNJ, MCD, MHP, MMM, NUE, PG, SHW, WMT