From the August 2011 issue of Research Magazine • Subscribe!

July 26, 2011

Dividend Achievers: Income and Growth for Any Market Environment

Stock prices have generally performed well in the past two years or so, and many stocks continue to offer attractive dividend yields. Some utilities, for instance, have had recent yields of more than 4.5 percent, while certain consumer stocks have paid over 2.5 percent; even a select group of high-tech companies have produced dividend yields surpassing 10-year Treasuries, according to data compiled by the “Wall Street Journal.”

The outlook for dividend initiations and increases is good, as well. Companies are sitting on large stockpiles of cash, and through May 31, 2011, over 150 companies raised their dividends.

Why Dividends Matter

Anecdotally, many investors’ interest in dividends seems to be negatively correlated with the equity markets’ performance. When the markets have a sustained move to the upside, capital gains take center stage. In bear or flat markets, a steady dividend starts to look attractive again.

But that attitude is shortsighted, of course: Dividends have accounted for about 40 percent of the S&P 500’s total return for the past 85 years.

Dividends offer potential income growth, as well. According to the spring 2011 edition of the “Mergent Handbook of Dividend Achievers,” 15 stocks in the Dividend Achievers Indexes have generated compounded annual dividend growth of over 20 percent for the last 10 years. That growth can provide valuable inflation protection, particularly for groups like retirees with high inflation-sensitivity.

While high dividends do not guarantee positive returns, dividends usually are a positive signal to the markets. In addition, notes Indxis Inc., a comprehensive index-services provider, companies that pay regular dividends tend to be in better financial health than their non-dividend-paying counterparts and produce sustained earnings and revenue growth.

Also, dividends help identify well-managed companies, the index provider says, adding that each dividend declaration “represents a promise by management and a vote of confidence by the board of directors in the company’s leadership.” Furthermore, companies that consistently raise their dividend payouts also raise the bar on their own performance expectations. And, finally, shares of dividend-paying companies possess built-in value that makes them generally more resilient in down markets, according to Indxis, with solid appreciation potential during earnings-driven market upturns and less price volatility.

Stability Counts

Simply chasing the highest available yields can be risky, experts say, as companies paying the most outsized dividends might not be able to maintain their payouts. A better strategy is to seek stocks with long-term histories of increasing dividends, which is the logic behind the Mergent Dividend Achievers Indexes.

The indexes provide an objective composite of companies with a history of increasing dividend payouts. To qualify as a Dividend Achiever, a company must have increased its dividend payout each year for the last 10 or more consecutive years and meet certain liquidity requirements. Indxis maintains the Dividend Achievers Indices, which may be licensed as investable products, including mutual funds, ETFs, UITs, structured products, separately managed accounts, and others.

While some Dividend Achiever Indexes cover U.S. and foreign markets, the Broad Dividend Achievers Index is perhaps the best known to U.S. investors. The index is comprised of companies incorporated in the United States or its territories, trading on the NYSE or NASDAQ and able to show increased annual regular dividend payments for the last 10 or more consecutive years. (In addition, Indxis requires that a stock’s average daily cash volume exceed $500,000 per day in the November and December prior to the annual reconstitution date on the last trading date in January.)

According to Mergent, this index is calculated using a modified market capitalization weighting methodology and has been published by the American Stock Exchange under the ticker symbol DAA since December 5, 2003. The indexes are also dynamic: Companies are added or dropped as they meet or fail to meet the qualification requirements.

For 2011, the Broad Dividend Achievers Index has 191 constituents compared with 212 in the 2010 index. According to Mergent, the net difference of 21 constituents is the result of dropping 25 companies that didn’t meet the criteria. Specifically, 20 of those companies failed to raise their dividends from 2009, two cut their dividends and three increased their dividends but failed the liquidity tests. The four companies added recently include ConocoPhillips, a large integrated international oil company; CARBO Ceramics Inc., an oil-well equipment and services company; and two electric utilities, SCANA Corp., and UniSource Energy Corp.

Corporate Focus

Questar Corp., a natural gas company based in Salt Lake City, Utah, is classified as a Dividend Achiever. According to Questar President and CEO Ron Jibson, the company has paid 266 consecutive dividends and has increased the dividend for over 30 consecutive years. Mergent reports that those dividends have grown at a 4.36 percent compounded annual rate for the past 10 years.

The dividend’s role as a component of the company’s common stock’s total return has changed in recent years, Jibson explains. Before the company spun off its exploration and production (E&P) operations in 2010, dividends were a minor component of its total returns. After the spin-off, dividends became more important, hence the accelerated dividend growth going forward, the executive notes.

Questar’s current goal is to grow dividends by 5 to 10 percent annually, driving the payout close to a 60-percent payout level. Its most recent increases were 8 percent in August 2010 and 9 percent in February 2011. Some 6,000 shareholders participate in the company’s dividend-reinvestment program. Questar’s stable high-return business mix and current yield of about 3.5 percent should help it attract new income-oriented investors, Jibson says.

Aqua America Inc., another Dividend Achiever with a history of solid returns, has increased its dividend by over 7 percent a year in the past decade, according to Chairman and CEO Nicholas DeBenedictis. He notes that Aqua America has raised its dividend 20 times in the last 19 years and has been paying it for more than 60 years consecutively.

The company’s board has a stated dividend-growth target of 5 percent, which it has exceeded for more than 10 years. Remaining cash is typically reinvested into its infrastructure.

That dividend policy has played an important role in boosting Aqua America’s total returns, especially during weak periods in the stock markets, DeBenedictis notes. As the company’s stock has improved, the dividend remains a key component (though a smaller percentage) of last year’s 32-percent total return. More than 80 percent of the company’s registered stockholders participate in its dividend reinvestment programs, which also offer a 5 percent discount on the shares’ market price.

NW Natural Gas, which has been in business as a distribution company for 152 years, says it makes about 85-90 percent of earnings from its utility work and the rest from gas storage. (Its predecessor company began doing business two weeks before Oregon became a state).

“The board of directors of Northwest Natural Gas (doing business as NW Natural Gas) is pleased to have provided shareholders with dividend increases averaging 5 percent a year for the past five years, and we are one of the few remaining public companies to have increased dividends paid per share for more than 55 years,” said David H. Anderson, NW Natural senior vice president and chief financial officer.

The company’s long-term earnings per share goal is growth of 5 percent or more per year on average, and it aims to pay out 60-70 percent of earnings in the form of a common dividend, according to the executive.

“Dividends, in some years, have made up a significant portion of our common stock’s total return and less in other years, when our share price has performed more strongly,” Anderson said. “Over the past 10 years, though, our total shareholder return has averaged 10 percent. Our current indicated annual dividend is $1.74 per share, with a yield of approximately 4 percent at our current share price.”

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