The First Cut: Dividend Achievers

    by John Bajkowski

    The First Cut: Dividend Achievers Splash image

    The First Cut is designed as a starting point for investors. Each issue we list the top 30 stocks that pass relatively simple screens of interest to individual stock pickers. AAII’s Stock Investor Pro screening software is used to generate the First Cut listing.

    During volatile markets, investors turn to the greater stability of dividend-paying stocks. Cash dividends directly contribute to the total return and help to limit downside price risk, provided the market feels that the dividend is secure. Mergent, formerly of Moody’s, publishes a number of “Dividend Achiever” indexes that are constructed with companies that have increased their dividend for 10 or more consecutive years. The High Growth Rate Dividend Achievers Index, which holds the stocks with the highest long-term dividend growth rates, and the Dividend Achievers50 Index, which focuses on the highest-yielding stocks, served as the inspiration for this issue’s First Cut.

    The First Cut universe was first limited to exchange-listed stocks with a share price above five dollars. Foreign stocks and REITs were then excluded because their dividends do not qualify for the maximum 15% federal tax rate. AAII’s Stock Investor Pro database provides seven years of data, so a filter requiring annual dividend increases over the last seven years was specified. Positive current earnings and expected earnings for the current and next fiscal year were also specified as minor financial strength screens. A total of 304 companies passed the complete screen and the First Cut table shows the 15 stocks with the highest seven-year historical dividend growth rates, and the 15 stocks with highest dividend yields (indicated annual dividend divided by price). The seven-year average yield shows the typical yield for each stock. The payout ratio (dividend divided by earnings) shows the percentage of earnings paid out in dividends.

    Investors need to exercise caution when filtering for extreme values. The future sustainability of a high growth rate must be assessed, while extremely high dividend yields signal the market’s expectation of a cut in the dividend payout. The high-dividend-yield segment of the First Cut table is dominated by banks, which have seen significant price declines. Many banks have reduced or eliminated their dividends and been forced to seek additional equity capital, sending their already low stock prices even lower. See the Stock Strategies article this issue for more information on analyzing banks.


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