In my last post I covered the easiest and most obvious way to get exposure to dividend stocks, by investing in dividend ETFs. While dividend ETFs give you one of the biggest benefits of dividend investing, higher returns, they fail to deliver on other key benefits of dividend investing; lower volatility, lower drawdowns, and more consistent dividends. By far the better choice is to invest in high quality individual dividend paying stocks. The challenge of course if finding those high quality dividend payers. In this post I’ll cover the best and easiest way I know to find a potential list of dividend payers for investment consideration.

The brute force way to find individual dividend stocks is to use a stock screener, like the good one offered at finviz , my personal favorite. You can search by all kinds of parameters, like dividend yield, to narrow your list of choices for further consideration. But there are better and easier ways. There are lists of quality dividend stocks that are used to create most of the dividend ETFs. Here quality is measured by how many years in a row a company has raised dividends. For example, the S&P Dividend Aristocrats list contains the members of the S&P 500 index that have raised their dividends for at least 25 years. Also, the US Dividend Achievers index contains all US traded companies that have raised their dividends for at least 10 years. The downside of these lists is that they limit their choices by using some other requirements for inclusion in the list such as index membership or minimum trading volume which I think are unimportant for individual investors. Index membership omits certain classes of companies such as MLPs. Or even crazier they don’t take into account spinoffs – so a company like Altria (MO) which has raised their dividend for 43 straight years doesn’t make either list because the absolute level of the dividend was cut in the spinoffs of Kraft (KFT) and Philip Morris (PM).

Fortunately, there is a great list of dividend stocks that is maintained by the good folks at the DRIP investing center . They maintain three lists of dividend paying stocks; dividend champions, dividend contenders, and dividend challengers. The lists are updated monthly and can be found here . Dividend champions are all US traded companies that have raised dividends for at least 25 years. Dividend contenders are all US traded companies that have raised their dividends for at least 10 years. And the dividend challengers are all US traded companies that have raised their dividends for at least 5 years. US traded companies means that these lists also include foreign companies that are traded in the US. As of the end of Jan 2012 there were 102 dividend champions, 152 dividend contenders, and 197 dividend challengers for a total of 451 high quality dividend payers to choose from. That’s less than 10% of all US listed stocks so that narrows the field considerably. This is simply the best list of dividend stocks out there.

The next step would be to further narrow the choices. There are many ways to do that. One would be just to focus on the highest quality list, the dividend champions. That’s still 102 choices. You could then sort by yield, P/E, payout ratio, etc… My preferred method is to sort each of the lists by the potential future returns, which I calculate using the magic dividend formula (return = div yield + div growth). For the champions and contenders list I used the 5 yr historical dividend growth rate, and for the challengers list I use the 3 yr historical growth rate. Here are the top 10 results for each list from the end of January data.

Top 10 dividend champion stocks by potential returns.

I used these results for further research and then took a position in AFL this month. AFL is even cheaper than it appears by the numbers in this list, trading at less than 10 times 2012 earnings and coming out of a cyclical downturn. WAG is also high on my potential investment list based on this data (I have trade options in WAG this month). WAG hasn’t been this cheap in the last 10 years. Next, lets look at the top 10 list of dividend contenders sorted by potential future returns.

Here Shaw, Nippon, and Teva look worthy of further research. The red numbers in the dividend yield column means the current dividend is less than the SP500 yield so I avoid those right away. Finally, lets look at the top 10 list of dividend challengers.

Here KOF, WES, and TWGP look interesting.

That’s about it. Using the dividend lists available for free at the DRIP center is by far the easiest way to narrow your search for quality dividend payers. The lists also contain a bunch of fundamental data which I’ve hidden in the screen captures that make further research a lot quicker and easier. Combined with the magic dividend formula to estimate potential future returns these dividend lists give the individual investor a serious arsenal of tools in choosing their own investments.

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12 thoughts on “ Searching for dividends: individual dividend stocks

  1. Thanks Paul. Really good article and very useful to me right now as I am scoping out some dividend opportunities.

  2. Thanks for all your articles. I’m quite a way from Investing for a Living, but I’ve found your articles to be an invaluable guide as I start thinking about and reshaping my portfolio for generating income

  3. Thanks Paul for all the information. I am semi retired and looking at a Monaco DP and would like to expand my investment income to augment my retirement as a Fulltimer. I would like to start self directing my IRA. I currently have my IRA with Edward Jones in income generating mutual funds earning about 6% annually. In your experience could a person reasonably expect to beat that rate without risking the farm?

    1. Hey Charles. In today’s low yield environment 6% is in the upper range of what is reasonable for income. At higher yields you start giving up dividend growth which is absolutely essential to build future wealth.


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