Attractively Priced Dividend Growth

With May’s market volatility, investors have rediscovered the allure of dividend-paying stocks. As the price of a stock falls, its dividend yield (yield divided by price) goes up. Higher yields attract investors, provided the market views the dividend as being secure.

A series of studies compiled by the Tweedy, Brown investment firm highlights the importance of dividends and the long-term benefits of investing in stocks with high dividend yields (www.tweedy.com/research/papers_speeches.php). Notably, the reinvestment of dividend income has played a critical role in stock returns over the years. There is substantial empirical evidence supporting a connection between high dividend yields and subsequently attractive stock returns. High-yield stocks tend to be less volatile, outperforming low-yield stocks during market downturns and recouping any bear market losses more quickly with their high dividend income. The studies also indicate that the attractiveness of high-dividend stocks holds true domestically and abroad.

This issue’s First Cut seeks out domestic, exchange-listed dividend-paying companies trading with current dividend yields above their seven-year average. This filter helps to highlight companies that may be undervalued compared to their normal valuation levels. Only companies with a payout ratio (dividend divided by earnings) below 50% and long-term debt-to-equity ratios below 50% made the First Cut. Beyond high-dividend-yield levels, investors often look for a record of high dividend growth. The 30 stocks with the highest historical dividend growth rates and no dividend decreases over the last seven years made the First Cut. The historical earnings growth rate and the consensus I/B/E/S earnings growth rate estimate over the next three to five years are presented in the table to help you gauge the market’s growth expectations for these stocks. The 52-week price change highlights recent stock market performance, while the market cap (share price times number of shares outstanding) helps to measure the company size.

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