In part one of this two-part series (Found Here) I laid the groundwork for why I believe that blue-chip dividend paying US equities represent not only a viable, but also a safer investment choice than many give them credit for. I also pointed out why I believe the risk profile on bonds is currently upside down, arguing that for one of the few times in history they may actually be more dangerous an investment than equities.
This is not normal, and therefore, I believe requires looking at investment choices differently than we traditionally have. I once read a comment from the renowned spiritual leader Dr. Wayne Dyer that summarizes my point quite nicely: “when you change the way you look at things the things you look at change.” In today’s investment environment I think we need to change the way we look at bonds and simultaneously change the way we look at equities. At least temporarily regarding bonds, until interest rates normalize, which I believe they eventually will. But perhaps we should change the way we look at equities more permanently.
I believe a critical part of changing the way we look at equities is by the recognition that there are wide differences in the safety profile of various equity classes. For example, many highflying non-dividend paying growth stocks tend to carry a lot more risk than more established dividend paying stalwarts. There are many reasons for this that goes beyond just the fact that the latter pays a dividend. On the other hand, the dividend itself is a great mitigator of risk. Maybe the best way to understand this is through a quote attributed to Will Rogers: “I’m not as concerned about the return on my money as I am the return of my money.” Every time a company pays you a dividend, you are receiving a return of your money as well as on it. Therefore, with each dividend paid you technically have less money at risk.
Additionally, the legendary investor Ben Graham shared his feelings on the safety of dividend paying stocks when he wrote in the value investor’s Bible, The Intelligent Investor in Chapter 11, Security Analysis for the Lay Investor as follows:
“4. Dividend Record. One of the most persuasive test of high quality is an uninterrupted record of dividend payments going back over many years. We think that a record of continuous dividend payments for the last 20 years or more is an important plus factor in the company’s quality rating. Indeed the defensive investor might be justified in limiting his purchases to those meeting this test.”
Of course it should go without saying, those companies on the prestigious Dividend Champions list of companies that have not only paid a dividend for 25 consecutive years (five more than Ben required), but also increased their dividend every year as well, goes beyond Ben Graham’s definition of a quality company. And therefore, since a defensive investor is by definition one that is wary of taking risk, it would only seem logical that dividend paying equities, especially Dividend Champions, possess the safety characteristics they desire, at least according to Ben Graham and yours truly (here is a link to David Fish’s list of dividend champions).
My Top 20 Dividend Champions
Before I reveal my favorite Dividend Champions, a few more introductory remarks on this specific equity class, and equities in general, are in order. First and foremost, even though every stock in the prestigious Dividend Champions list shares the characteristic of 25 years of consecutive dividend increases, they are not all the same. In truth, the discerning investor will discover many differences among the characteristics between the individual companies (105 in total) and the overall group. But for purposes of this article, I will concentrate on two primary subsets within the group as I screen for my favorite 20. Then, I will create two top 10 lists for each subset based on the different characteristics that each subset possesses.
The reason I am focusing on these two different classes of Dividend Champions is because they each provide characteristics that best serve the unique needs of dividend growth investors with different goals and objectives. One set will serve the dividend growth investor that is perhaps already retired and seeking maximum current income, while set number two might better serve the dividend growth investor that is near retirement but still has some time to accumulate assets before needing to harvest yield. Therefore, subset one will focus on yield with total return secondarily, and subset two will focus on total return with yield secondarily. Nevertheless, yield on cost, or what I prefer to call growth yield, will be an important attribute of both groups.
Dividend Champions That Were Screened Out
Instead of providing a long list of metrics that I used to eliminate Dividend Champions, I thought it might be more efficient to illustrate it with pictures. I’ve always felt that utilizing statistical representations from which to make investment decisions is fraught with error. Even though the statistics can be accurate, they can mislead you due to their lack of what I consider to be relevant details. For example, as most readers may know, the Dividend Champions list is comprised of 105 companies that share a vital data set. Each company on this prestigious list possesses a consecutive streak of at least 25 years of dividend increases.
Therefore, on the surface, it would be easy to assume, based on this statistic, that each company on the Dividend Champions list has a consistent long-term record of earnings results. This assumption is logical, because dividends are paid out of earnings. In other words, a consistent and long-term consecutive streak of dividend increases implies steadiness. Here is where the phrase a picture is worth 1000 words really becomes apparent. The following three examples utilizing F.A.S.T. Graphs™ are Dividend Champions that were rejected because of a significant lack of evenness with their operating results.
Nacco Industries (NC)
From their website:
“NACCO Industries, Inc. is an operating holding company with subsidiaries in the following principal industries: lift trucks, small appliances, specialty retail and mining.”
Old Republic International Corp (ORI)
From their website:
“Chicago-based Old Republic International Corporation is one of the nation’s 50 largest publicly held insurance organizations. Its most recent financial statements reflect consolidated assets of approximately $16.16 billion and common shareholders’ equity of $3.77 billion, or $14.74 per share. Its current stock market valuation is approximately $2.29 billion, or $8.82 per share.
Note: ORI announced a spinoff of subsidiary RFiG along with a leveraged buyout. Therefore, the future prospects of this company may be changing for the better giving it speculative appeal.”
Mercury General Corp (MCY)
From their website:
“Mercury General (NYSE-MCY) is the leading independent broker and agency writer of automobile insurance in California and has been one of the fastest growing automobile insurers in the nation. It is ranked as the third largest private passenger automobile insurer in California, with total assets over $4 billion. Mercury also writes automobile insurance in Arizona, Florida, Georgia, Illinois, Michigan, Nevada, New Jersey, New York, Oklahoma, Pennsylvania, Texas and Virginia. In