From the July 2006 issue of Research Magazine • Subscribe!

July 1, 2006

High-Yield Advantage

Companies continue to demonstrate how and why their top priority is long-term shareholder income, and business-data provider Mergent has made a name for itself over the last quarter century by uncovering stocks that offer just that combination of stability and income potential.

To make Mergent's elite list of Dividend Achievers(TM), a company must first be listed on a major exchange and pay regular dividends, which eliminates all but 3,300 North American issuers. In addition, companies must maintain a certain level of liquidity and, most important, have demonstrated an ability to increase their annual payout every year for the last decade. The companies that meet these criteria -- currently 318, or about 3 percent of the total market -- have recently earned a spot in the Dividend Achiever index and intensive coverage in Mergent's quarterly "Dividend Achievers Handbook."

"We find that investing in an index of companies with consistent dividend growth provides the investor with market returns, but with much lower portfolio volatility," explains Robert Andrialis, Mergent president. "Dividend growth can provide the investor with inflation protection on the purchasing power of their dividend income. This is especially true of investors in the distribution phase who are living off their dividend income."

An Investable Universe

Early forms of the list date back to 1979. More recently, Wall Street has started applying Mergent's methodology to a variety of both actively and passively managed investment vehicles, all with the objective of capturing current income as well as capital growth potential.

In April, Vanguard became the second company to launch a Dividend Achievers ETF, joining a family of existing exchange-traded funds from PowerShares. The Vanguard product, branded as the Dividend Appreciation Index ETF tracks the 50 members of the Mergent 318 with the highest dividend yields; on average, members of this extra-elite subgroup return 4.18 percent of their stock price to shareholders every year. By comparison, S&P 500 constituents deliver an average yield of around 1.6 percent.

Other dividend-driven investment vehicles are built around less strict indices (setting the bar at five years of consecutive dividend increases, for example), prompting equity analyst Michael Krause of Altavista Independent Research to make a case for Mergent's approach for ensuring that only "mature companies with exceptional records of profitability" join the list.

Krause likes the Dividend Achievers-indexed products for providing equivalent but less volatile returns than competitors, making them appropriate for "more conservative, income-oriented" investors -- again, such as those in retirement.

The Dividend Achievers Index, in fact, created the entire category, according to Shirley Petersen, who heads up Mergent's index-services division. "The Mergent Dividend Achievers Index was used by Dow Jones in their white paper prior to the launch of the Dow Jones Select Dividend ETF" developed by Barclays, she says. "I believe that speaks volumes for the name Mergent Dividend Achievers."

The Class of 2006

Mergent reconstitutes its list every year on the last trading day of January, adding companies that keep fattening their dividend payouts for the requisite decade and deleting those that fail to extend their track record. This year, 25 new names made the list, including several banks and Dow industrials component IBM. On the other hand, 16 companies, most notably Fannie Mae and Marsh & McLennan, fell off the list.

"The most noteworthy of the changes in the reconstitution include the addition of IBM," says Petersen. "The Standard Industrial Classification Sector breakdowns between 2006 and 2005 are similar, with a slight reduction in finance, insurance and real estate companies in 2006 and an increase in transportation, communications, electric, gas and sanitary services companies."

In fact, finance, insurance and real estate still account for 29 percent of the Dividend Achievers, down from about 31.4 percent in 2005. Manufacturing companies make up 55 percent of the list, with retail, services and other sectors representing the balance (16 percent).

In terms of market capitalization, these companies range from $181 million to $385 billion (General Electric). With a mean capitalization of over $17 billion, most Dividend Achievers (about 88 percent) are part of the large-cap arena. The fact that this characterization resembles that of last year should be little surprise, says Peterson, given "the low annual turnover of the index and the fact that most of the largest-market-cap companies are long-term constituents."

What It Takes

That long-term, low-volatility focus is shared by constituents like the diversified-energy company MDU Resources Group Inc., of Bismarck, N.D., which has made its quarterly dividend payments since 1937 and has been on the Mergent list for the last five years. Though many pipeline companies pay a relatively rich dividend, MDU stands out because of its commitment to keep expanding its operations in order to keep paying successively higher dividends with each passing year.

"We have a good mix of businesses, balanced between income and growth components," explains MDU Resources CFO Vernon Raile, who has been with the company since 1980. "We remain committed to our growth and income focus. We're committed to paying a competitive dividend, but we also want to achieve growth."

MDU is active across the energy supply chain -- from oil and gas production to distribution, gathering and power generation. Naturally, the company's oil and gas operations are benefiting from high commodity prices and the drilling boom. But the company's construction materials subsidiary, traditionally a relatively stable income generator, has also been seeing growth, according to Raile.

"We generate a lot of cash, and that allows us to pay both the competitive dividend and fund new business propositions," he adds. "Shareholder value is obviously an important part of the equation."

Over the last five years, MDU has boosted its dividend by 23 percent, while its annualized shareholder return has climbed 12 percent per year. In 2005 alone, shareholder value jumped 26 percent. The company has also established a history of splitting its shares to reward shareholders, most recently authorizing its fourth three-for-two split since 1995.

Growth Plus Income

It's the growth factor that makes a Dividend Achiever, says Mergent President Robert Andrialis, who points out that relatively low-yielding (but growing) companies like rapidly expanding drugstore chain Walgreen are on the list alongside high-yielding (but mature) names like utility Consolidated Edison.

"Dividend Achievers are about dividend growth and not necessarily dividend yield," he explains. "Dividend yields are not as important as dividend growth since distressed companies can have a high dividend yield. There are no distressed high-yield companies in the Dividend Achievers Index."

In terms of stability and growth, Kimco Realty, the nation's largest shopping center operator, is another top performer. With its REIT structure, Kimco is legally required to distribute at least 90 percent of its net income to shareholders through dividend distributions. It's the company's long-term success in finding and capitalizing on growth opportunities, though, that led Mergent to add it to the Dividend Achievers list.

"That's the secret," says Scott Onufrey, the company's vice president of investor relations. "If you generate the earnings, as a REIT, the dividend will always follow. Our growth rate last year was 12.8 percent, so it's to be expected that our dividend will follow."

Like MDU, Kimco has authorized multiple stock splits over the last decade, and this is only one of the ways the company has generated value for investors. The company paid a healthy $1.27 a share in 2005, translating into a yield of 3.53 percent, and has increased its dividend since its IPO 14 years ago.

However, Kimco's Onufrey characterizes even that payout as "very low" given the company's overriding dedication to passing on profits to shareholders. "I think it's important for Kimco that the dividend's always been a priority for management," he says. "The dividend is sacrosanct."

Mergent's Dividend Achivers

Based in New York City and Charlotte, N.C., Mergent Inc. has been collecting and delivering high-quality financial information since 1900. The company's databases include key financial, fundamental and descriptive material for more than 15,000 U.S. public companies and another 20,000 companies listed in 100 foreign countries.

Companies that have had a stellar performance -- based on the number of consecutive years they have paid increasing dividends -- and featured in this issue of Research are :

CompanyConsecutive Years

Of Increasing Dividends

Procter & Gamble Co.52

ServiceMaster Company35

General Electric Co.30

McDonald's Corp.29

Bemis Co. Inc.22

Alberto-Culver Company21

United Dominion Realty Trust Inc.20

National Retail Properties Inc.16

MDU Resources Group15

Aqua America Inc.14

Prologis 11

Source: Mergent Dividend Achievers

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