I have written about my dividend investing journey for almost a decade now. One of the most common question I get asks how I identify companies for further research. In today’s post I will discuss the simple steps I use to obtain a manageable list of companies for further research. These are all used for potential additions to my dividend portfolio. Investing does not have to be complicated, and this simple process attests to this fact.

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Dividend Champions
geralt / Pixabay

The first step I take is to start with the list of the US dividend champions, which is maintained and updated by David Fish every single month. To be a dividend champion, a company must have been able to increase its annual dividends per share for a minimum of 25 consecutive years. Only a company with a defensive business model can afford to grow the business, while also raising the dividend annually for a quarter of a century. Being a dividend champion is an indication of quality.

The second step I take is to focus on valuation. I look at the companies which sell at a P/E of 20 or lower. We look at valuation, in an effort to avoid overpaying dearly for an investment. Even the best company in the world is not worth overpaying for. When you buy at a lower price, your future expected returns are higher than buying at a higher price. I typically use Yahoo Finance’s trailing 12 months earnings for the earnings portion of the Price to Earnings calculation. However, I have found that one-time items have made it very difficult to determine the correct earnings power. This is why I use P/E based on forward earnings as a quick trick to scan a large group of companies, without getting bogged down in researching 100 one-time hits/gains to earnings.

The third step I take is to focus on dividend safety. I accomplish this task by eliminating companies that have a dividend payout ratio above 60%. A dividend, which is well covered by earnings, is safer even when a recession hits and earnings dip temporarily.

The fourth step I take is to look for annual growth in dividends per share. In retirement, we are looking for an income stream that will at least maintain its purchasing power from the destructive forces of inflation. In this case, I focused my attention on companies where annual dividend payments grew faster than 3%/year over the past decade.

The next step I take is to evaluate trends in earnings per share over the past decade. I want to determine if dividend growth was supported by growth in earnings. Without growth in earnings, future dividend growth will run on fumes for a while, until it stops. The whole premise of successful dividend growth investing is to identify a company for the diversified portfolio with a growing dividend, purchase it at an attractive valuation, and have the company grow its earnings, dividends and intrinsic value for as long as possible.

After applying my criteria above on the list of dividend champions, I come out with the following list of companies for further research:

Company Name Symbol Dividend Track Record Years Forward P/E 10 Year Annual Dividend Growth Dividend Yield Dividend Payout Ratio Dividend/Share Last Price
AFLAC Inc. AFL 34 11.04 11.68% 2.30% 24.48% $ 1.66 $ 74.84
Target Corp. TGT 49 13.01 18.09% 4.41% 55.50% $ 2.32 $ 54.40
T. Rowe Price Group TROW 31 13.59 14.45% 3.27% 42.69% $ 2.19 $ 69.70
Walgreens Boots Alliance Inc. WBA 41 14.77 17.83% 1.85% 26.91% $ 1.48 $ 81.25
Tompkins Financial Corp. TMP 30 15.23 5.45% 2.34% 34.98% $ 1.77 $ 77.06
W.W. Grainger Inc. GWW 46 15.28 15.84% 2.95% 42.96% $ 4.88 $173.58
Lowe's Companies LOW 54 15.29 22.92% 1.73% 25.14% $ 1.33 $ 80.91
Carlisle Companies CSL 40 15.58 9.60% 1.37% 20.61% $ 1.35 $ 102.06
Bemis Company BMS 34 15.8 4.32% 2.67% 41.20% $ 1.17 $ 44.86
1st Source Corp. SRCE 30 16.49 4.01% 1.64% 25.62% $ 0.72 $ 46.35
Stepan Company SCL 49 16.53 6.91% 0.95% 15.19% $ 0.79 $ 85.96
Johnson & Johnson JNJ 55 16.57 8.03% 2.65% 41.12% $ 3.15 $ 126.92
Eaton Vance Corp. EV 36 16.59 9.85% 2.37% 38.25% $ 1.09 $ 47.29
H.B. Fuller Company FUL 48 16.66 8.26% 1.18% 18.30% $ 0.56 $ 50.98
VF Corp. VFC 44 16.84 12.17% 3.13% 47.96% $ 1.53 $ 53.71
Stanley Black & Decker SWK 49 16.91 6.71% 1.70% 28.31% $ 2.29 $ 136.79
Sonoco Products Co. SON 35 16.94 4.28% 3.06% 48.50% $ 1.46 $ 51.00
UMB Financial Corp. UMBF 25 17.14 6.75% 1.43% 23.80% $ 0.99 $ 71.29
Medtronic plc MDT 39 17.16 14.66% 2.02% 33.67% $ 1.67 $ 85.09
Genuine Parts Co. GPC 61 17.63 6.92% 2.89% 50.09% $ 2.65 $ 93.28
Commerce Bancshares CBSH 49 17.78 4.62% 1.66% 28.20% $ 0.86 $ 54.23
RPM International Inc. RPM 43 18 5.56% 2.22% 38.33% $ 1.15 $ 53.99
Becton Dickinson & Co. BDX 45 18.02 12.16% 1.57% 26.18% $ 2.71 $ 186.48
Leggett & Platt Inc. LEG 45 18.15 6.86% 2.76% 46.69% $ 1.34 $ 52.08
Hormel Foods Corp. HRL 51 19.03 15.27% 2.05% 34.48% $ 0.60 $ 33.12
General Dynamics GD 26 19.04 12.81% 1.66% 29.38% $ 3.12 $ 202.24
SEI Investments Company SEIC 26 19.14 16.29% 1.12% 20.61% $ 0.54 $ 50.15
Kimberly-Clark Corp. KMB 45 19.16 7.06% 3.00% 55.18% $ 3.73 $ 129.51
Illinois Tool Works ITW 42 19.97 12.55% 1.85% 34.14% $ 2.40 $ 140.37

The data was obtained from a watchlist I maintain at Yahoo! Finance. The data was obtained on Monday, May 29, 2017.
This list is not an automatic buy. It is just a list of companies for future research, which could potentially be added to an investor’s diversified dividend growth portfolio.

It is important to keep screening the list of dividend champions regularly, because different companies are available for sale at different times. It is also important to allocate money to a dividend portfolio regularly. It is time in the market that creates wealth with equities, not timing the market.

Thank you for reading!
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Article by Dividend Growth Investor