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.