If you're looking for dividend-paying stocks, you need to know the Mergent Dividend Achievers.
One of Mergent's chief activities is tracking and listing companies that qualify as "Dividend Achievers" -- ones that have increased their dividends annually over the past decade and that meet certain liquidity requirements. These firms number only about 300 or so, out of many thousands of public companies.
Why does this matter? Well, because dividends can really pack a punch for your portfolio. According to an Ibbotson study, reinvested dividends made up 40% of total stock returns from 1926 to 2006.
If you're an aficionado of dividends, as I am, you might be wondering how to invest in these companies. Sure enough, you can now buy exchange-traded funds (ETFs) based on the Dividend Achievers index, such as the PowerShares Dividend Achievers ETF. The fund recently sported a 1.8% dividend yield.
But that's not exciting enough for me. If all a company has to do to get on the list is increase its dividend for 10 years in a row, that's not all that impressive. (Well, it's sort of impressive. Companies in trouble usually can't afford to hike their dividends at all and sometimes have to reduce or eliminate them. So these firms seem to be healthy, at least.) But a company could have raised its dividend by just a penny or two each year and still make the list.
Stronger measures
The folks at Dividend Achievers headquarters may have been thinking along the same lines because they now offer several subsets of the big list. There's the Dividend Achievers 50 Index, for example, which tracks the 50 highest-yielding stocks on the list. That's more attractive to me as an investor. Healthy companies with high dividend yields tend to be ones that have been beaten down a bit. (Since the dividend yield is a ratio of dividend amount to stock price, as the stock price falls, the yield rises.) That list is yielding about 4.6%.
Here's another attractive alternative: the High Growth Rate Dividend Achievers index, with a recent yield of 2.5%. This index takes the 100 stocks from the list that have the highest growth rate in their dividend payout. That gives you a way to invest in 100 of the most active dividend payers around -- companies that have been hiking their dividends aggressively over the years.
Some examples include:
|
Company |
Dividend Yield |
|---|---|
|
McDonald's |
2.7% |
|
Medtronic |
1.0% |
|
Johnson & Johnson |
2.6% |
|
United Technologies |
1.7% |
|
Wells Fargo |
3.7% |
|
American International Group |
1.3% |
|
Pfizer |
4.8% |
Some caveats
Go right out and snap up shares of ETFs that track these indexes if you want -- but remember, they're not perfect. For example, due to their limited quantitative scope, they will invariably include some companies that might not be high on your list of candidates. Pfizer, for example, despite its various attractions, is not universally loved. In our CAPS stock rating system, for example, 16% of our all-star participants (more than 70 of them) are bearish on the company, with some pointing to expiring patent protection on various blockbuster drugs and a pipeline of new drugs that isn't as inspiring as it might be.
Still, since these are indexes of many companies, one bad performer won't torpedo your entire portfolio. That's what diversification prevents.
If you want to invest with a stronger focus, though, do some research. Look for the most attractive companies you can find that pay sizable dividends and that have also hiked those dividends regularly and significantly.
If you'd like some help with that, I encourage you take advantage of a free trial of our Motley Fool Income Investor newsletter, which is outperforming the S&P 500 and offers many stocks yielding more than 5%. There's no obligation, and you'll be able to access all past issues and read about every recommendation in detail.
