From the August 2009 issue of Research Magazine • Subscribe!

August 1, 2009

A Disciplined Approach: Dividend Achievers

To share growing dividends with investors over time, companies must consistently and conservatively manage their businesses -- and their growth.

Research Dividend Achiever's Index

As tracked by Mergent Inc., these companies have increased annual regular dividends for at
least the past 10 consecutive years while meeting certain liquidity-screening criteria:

Enterprise Products Partners L.P. (EPD) -- 10 Years
MDU Resources Group Inc. (MDU) -- 18 Years
National Retail Properties Inc. (NNN) -- 19 Years
Northwest Natural Gas Co. (NWN) -- 53 Years
Procter & Gamble Co. (PG) -- 55 Years
RPM International Inc. (RPM) -- 35 Years
WGL Holdings Inc. (WGL) -- 32 Years
W. P. Carey & Co. (WPC) -- 10 Years

Source: Mergent, 2008

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When markets face challenging times, investors often look to safer, steady investments. In 2009, the disciplined approach of companies included in the U.S. Dividend Achievers Index serves as a model of the corporate performance, risk management and total returns that many investors may be looking for, experts say.

"As more investors are concerned about lower-risk investments, a company with a long-term track record of annually increasing its dividends tends to mitigate some of the risk based upon this track record, which results in lower volatility for Dividend Achiever companies and/or products, compared to the S&P 500 Index," explains Bob Andrialis, director of index licensing for Indxsis Inc., the index-services unit of the business-information firm Mergent Inc.

Recently, Mergent removed 63 companies from the Broad Dividend Achievers Index and added 23 new companies. The index now includes 283 firms.

"Investing in companies producing increasing and sustainable dividend increases over long periods of time has been a priority for many investors, as it generally shows the quality of the company, consistency of financial performance, capabilities of management and good corporate governance," Andrialis says.

Historically, dividends have accounted for 40 percent of the total return for the Dividend Achievers Index compared to about 25 percent for the S&P 500 Index.

"As you reinvest these dividends and benefit from the effects of compounding over long periods of time, you find that the Dividend Achievers Index has outperformed on a total return basis on lower volatility," adds Andrialis. "Said another way, the Dividend Achievers Index generally results in higher returns at lower risk (more for less). One reason for this is that the Dividend Achievers Index does not have technology companies in it as many have only paid dividends for a few years, while the S&P 500 includes technology companies and hence the increase in volatility."

Success Stories

How do companies meet the rigorous criteria of Mergent's Dividend Achievers over time? Different businesses, of course, have their own approaches to building an above-average business model that lasts.

"What has allowed us to produce consistent dividends over the long term has been the fact that we have long-term net leases on great retail properties leased to good rent-paying tenants, which produces solid returns with below-average volatility," says Kevin B. Habicht, CFO of National Retail Properties, Inc., an Orlando, Fla.-based real estate investment trust that owns some 1,000 properties in 44 states.

"That business model coupled with a conservative balance sheet and a dividend payout that is well covered by current operating cash flow has allowed us to increase annual dividends per share for 19 consecutive years," explains Habicht. "We have been careful to make measured dividend increases in the good growth years so that we can continue growing dividends in the more modest years."

Successfully executing this strategy year after year is not always easy for National Retail Properties, but it is possible thanks to its underlying focus. "Despite the recent economic turmoil, our occupancy rate has held up fairly well. This goes back to owning good properties with good rent-paying tenants. And our balance sheet, which we manage conservatively, is not under any stress from near-term debt maturities or over-leverage," Habicht says. "We believe the current dividend is secure and we intend to make this our 20th consecutive year of increased dividends.

"Our distribution approach has been to grow the dividend annually and push the dividend-payout ratio lower," he continues. "This means that earnings are growing slightly faster than the dividend is, and the dividend is becoming more secure from any kind of economic downdrafts, like the one we are in."

Enterprise Products Partners L.P. in Houston, which transports, stores and processes hydrocarbons, mainly natural gas and natural gas liquids, has its own formula for paying consistent and growing dividends - which, given its status as a master limited partnership, are classified as distributions.

"We do this by effectively managing our integrated platform of assets and investing in capital projects and acquisitions with attractive returns on investment that exceed our cost of capital," says Randy Burkhalter, vice president of investor relations. "We are a midstream energy company with over 36,000 miles of natural gas, natural gas liquids and crude oil pipelines. We are not in the drilling or exploration and production business," Burkhalter explains.

"This primarily volume-driven business reduces our risk profile and insulates us somewhat from the short-term price fluctuations in commodities," he says. "Given our size and diversified portfolio of assets, as well as our strong balance sheet, we have been able to continue to grow. That leads to new sources of cash flows, which supports increases in cash distributions."

As with other Dividend Achievers, steady performance is extremely important to Enterprise Products Partners and its business model. "Our first priority is to provide solid coverage for the quarterly distribution that we pay to our limited partners from distributable cash flow, which we generally define as cash earned from operations before changes in working capital less maintenance capital expenditures," Burkhalter states.

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