Dividend Attraction

By: Kevin Matras
June 23, 2009

In this week’s roundtable discussion, we talked about the prospect of slower growth in the US (approx. 2% as opposed to the historical 3%). This discussion also included slower growth rates in the emerging markets as well.

One of the reasons for the projected slower growth rates is the across the board de-leveraging we’re seeing from businesses to individual households. Businesses in general will find it harder to acquire credit/financing to expand their businesses. And consumers will find it tougher to afford all of the goods and services that they desire. And while small cap companies with innovative products and solutions will always have an audience, I believe the larger, stable and more solid companies will gain additional attention in times like these and become sought-after holdings.

Many larger companies are large because they have an established and loyal customer base with widespread usage of their products. In turn, they see steady and sustainable growth for their business. It is unlikely that financing is an issue for their operations. And they likely generate a great deal of cash. But that’s not all. A lot of the big name companies will also pay their investors a nice dividend.

And as different investment vehicles compete for investors’ cash in this lower growth environment – the companies offering a ‘little extra’ (dividends) will have an edge.

What’s interesting is that a lot of companies have cut their dividends while others have stopped paying them altogether, making the search for good paying dividends that much harder. But they are still out there if you’re committed to finding them.

Smaller growth companies will typically not pay a dividend as they will pour all their money into growing their business. However, the larger companies that have solid earnings, but without the aggressive growth rates that may have marked their earlier years, will often reward their investors by paying out a portion of their earnings in dividends. And these are the companies we’re looking for in this week’s screen: strong stocks with good dividends and a track record of excellent growth and payment history.
* Zacks Rank less than or equal to 3
(This will give us Zacks #1 Ranks, Zacks #2 Ranks and Zacks #3 Ranks. It’s harder for a larger cap company to crack the #1 and #2 spots, so we’re allowing #3’s. But no Zacks #4 Ranks or Zacks #5 Ranks, which are Sells and Strong Sells.)
* 5 Year Historical Growth Rate >= 10%
(We want to see a history of solid growth.)
* Next 3-5 Year Projected Growth Rate >= 10%
(In addition to a track record of solid earnings, it’s important to have a successful future of solid growth as well, otherwise your dividend could be in jeopardy. And 10% is still pretty exciting when you consider that growth will be harder to come by nowadays in light of the slower growth predictions.)
* 5 Year Average Dividend Yield >= Average for the S&P 500
(We’re looking for above average market yields.)
* Current Dividend Yield >= 5 Year Average Dividend Yield
(We’re also insisting that their current yield be greater than their average dividend yield over the last 5 years.)
Of course, this screen will not preclude a company that decides to cut their dividend in the future. But these additional measures should help us find some of the best dividend paying companies with a history of success.

Here are 5 stocks from this week’s screen:
ITC – Snapshot Report ITC Holdings Corp.
MCD – Analyst Report McDonald’s Corp.
PEP – Analyst Report Pepsico, Inc.
RSG – Snapshot Report Republic Services, Inc.
VIVO – Snapshot Report Meridian Bioscience, Inc.

Get the rest of the stocks on this list and start finding top dividend paying companies on your own today. It’s easy to do.

Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.