A Short List

Finding Gems

Consider the number of companies that regularly raise their dividends. Then consider how many have done so over a long period of time. The list isn't very long. Then, consider how many of them have both good earnings quality and payout ratios that are sustainable. Then the list gets really short.

A big limiting factor is that a number of companies have had to cut their dividend at some point. This action, while sometimes necessary to preserve cash flow, says a lot about management's perception of the stability of cash flow and earnings. Contrast this with a company with a year or two of losses, but whose board decided to keep paying the existing dividend until earnings returned. The latter case says a lot about how management views shareholders.

The current portfolio has most of the best that meet this criteria. I only found a few companies remaining that are considered good candidates for future purchase. Anyone who has suggestions for more that are missing from the list or portfolio, please send them. I welcome your input!

Here is my current buy candidate list:

Brinker (EAT) - Best of the restaurant group; not the greatest yield, but we want restaurant coverage and this one is the best; I would have picked McDonald's (MCD) but for the huge run it has already had (in part due to its large dividend increases). If the stock price falls back MCD would then become the preferred choice.

Omnicom (OMC) - Great ad firm; also has a stingy yield, but is a quality company and it is increasing dividend payouts.

Universal Corp (UVV) - We currently own Altria (MO) so buying this leaf tobacco co. might be redundant, but if later we are inclined to buy more Altria, we'd pick up this one instead.

Carlisle Companies Inc. (CSL) - Quality conglomerate, like the above picks, has reliable earnings and shareholder's interests in mind.

We have good bank coverage, but also like Cullen/Frost Bankers Inc. (CFR) and Citigroup (C).

Some others I really like, but would not buy just yet are:

Nuveen Investments Inc. (JNC), FPL Group Inc. (FPL), Laidlaw International Inc. (LI), Johnson Controls Inc. (JCI), Eaton Corp. (ETN), and Eni SpA (E).

Where to Check for Dividends

Yahoo Finance lets you screen for dividends using its 'price history' area.

For example, here is a link to Citigroup's history.

In the box entitled "SET DATE RANGE," select the radio button for "Dividends Only." Now you have the company's dividend history.

These Don't Quite Fit

I just added Ford (F) to the portfolio. It is the smallest holding and I bought it as a turnaround play. They have cut their dividend a number of times, so it doesn't really fit our approach very well, but we're going to give it a (small) chance.

The telecoms have had a checkered past, particularly when it comes to dividends. But I needed to ensure we had this sector covered to ensure the portfolio has adequate diversification. The ETF approach fits the bill here. Telecom HLDRs (TTH) top ten holdings consist of (thanks, Yahoo!):

Name, Symbol, % of Portfolio
ALLTEL CP, AT, 3.16
AT&T INC., T, 31.29
B C E INC, BCE, 3.85
BELLSOUTH CP, BLS, 19.99
CENTURYTEL INC, CTL, 1.18
EMBARQ CORP, EQ, 1.18
QWEST COMM INTL INC, Q, 3.31
SPRINT NXTEL CP, S, 9.17
TELEPHONE + DATA SYS, TDS, 1.45
VERIZON COMMUN, VZ, 23.81

The dividend history is a bit erratic, but buying this ETF was the best dividend approach I could find for telecom coverage. Here is the dividend history for TTH:

2000 $0.71
2001 0.88
2002 2.84
2003 0.99
2004 2.21
2005 1.15
2006(Est.) 1.27

Certainly holding TTH (as well as Ford) adds a bit of instability to the mix at least from a dividend cash flow point of view. Daimler Chrysler (DCX) is probably the better play, but the U.S. auto industry is overdue for improvements, and Ford would be the largest benefactor of that trend in my view. Certainly you don't want to bet the farm. Delta Airlines was cheap at $0.70, but I only bought 900 and unloaded it at around $1.20. Things like Delta and Ford are just not something you hold onto very long or sink a lot of money in.

Motley Fool's take on 'dividend growth'

Motley Fool wrote up our approach back in 2002. They cover the idea pretty well. Also there are some good articles from Statesman.com and Investment U.