Value Investing News

What a difference a year makes. This time last year we were looking at big-name dividend cuts and very few increases. Last week’s 16 increases set the stage for this week’s flood of companies, large and small, raising cash dividends paid to their shareholders.

The dividend aristocrats list includes companies which have increased dividends for over 25 years in a row. It is equally weighted and re-balanced once an year. Over the past 3,5 and 7 years the index of elite dividend stocks has managed to outperform the S&P 500 by 5%, 3.7% and 4.40% respectively.

Most companies use debt for a variety of reasons in their operations. It could be either short term or long-term obligations. If there’s anything the 2007-2009 financial crisis has taught us, it is that excessively leveraged companies could easily blow up after a chain of negative events. Thus it pays to know what the debt situation for a particular company you are investing in actually is.

One way in which to uncover stock investments is to run stock screens. Once resulting stocks are uncovered, one should track the performance of the screen before investing any real dollars. Additionally, conducting fundamental and detailed research on each stock is recommended before investing. This article contains a stock screen that incorporates some of Warren Buffett's criteria.

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

Despite Avery Dennison's recent dividend cut,the dividend aristocrats index appears to be business as usual in 2009.The dividend aristocrats represent S&P 500 members which have consistently raised their dividends for more than 25 consecutive years. At the end of 2008, there were 52 constituents in the index.

Avery Dennison (AVY) just declared a quarterly dividend of 0.20/share, which represents a 50% decrease from last quarter’s payment of 0.41/share. The company reduced its dividend to support debt reduction efforts. The company also reported $0.56 in 2Q earnings per share, which didn’t provide sufficient coverage for the dividend.

As a dividend growth investor, my goal is to generate a rising stream of dividend income. Thus I would have to be selective not only about picking individual stocks, but also about selecting companies from a variety of industries, countries and size, in order to avoid a widespread implosion in overall dividend income.

S&P 500, which is the benchmark against which most money managers track their performance, lost 11.67% in the first quarter of 2009. The S&P Dividend Aristocrats however underperformed the benchmark by almost 2% after losing 13.84% in the first quarter. Now if we add dividends to the picture the S&P 500 loss drops to 11.01% while the loss for Dividend Aristocrats decreases to 12.90%.

Overall investors have mainly been focusing on dividend cuts in 2009. Since most stocks that pay out dividends are cyclical in nature, they do not have the specific competitive advantages, which provide for a long and sustainable annual dividend increases over time.

Several companies rewarded their long-term shareholders with news of dividend increases last week.

On Tuesday, U.S. Treasury Secretary Timothy Geithner called for a new program aimed at unfreezing credit markets. The the markets were underwhelmed. In the midst of the turmoil, an American Aristrocrat and a Canadian Achievier stood tall.

The typical dividend aristocrat is a mature company with wide moat that has weathered the storms of many boom and bust cycles while continuing to increase dividend payments to shareholders. These companies as well as the dividend champions are the cornerstone to my dividend strategy.