At the beginning of 2010, the US economy continued to suffer through difficult times and forecasted growth was modest. I suggested at that time that high dividend paying companies with secure cash flow would likely outperform the broad market. Therefore, I created a list of companies that were listed on the Dow 30, the S&P 500, or the Nasdaq 100 indices that had a minimum dividend yield of 4% and had at least 40% excess levered free cash flow compared to the amount of money paid out as dividends.
During that year, the 22 companies that I identified had an average return of 27% including dividend yield, which was approximately 12% higher than the S&P 500 index return in 2010.
Again at the start of 2011, I created a similar list of stocks that met the secure dividend yielder criteria. These companies were:
Pfizer
Verizon
CenturyLink (now merged with Qwest Communications, another qualifier)
Pitney-Bowes
R.R. Donnelly
Lorillard
Integrys Energy Group
Eli Lilly
Cincinnati Financial
Leggett & Platt
Phillip Morris International
People’s United Financial
Lockheed Martin
With continuing slow economic growth in the US, these secure dividend yielding companies have again significantly outperformed the broader market. As expected, the dividends for the 13 companies proved to be secure. Many of them increased during the year and none fell.
In 2011, the S&P 500 finished the year virtually unchanged and had a dividend yield of 1.8% for a total return of 1.8%. Meanwhile, the Dow 30 experienced a 5% gain and a dividend yield of 1.7% for a total return of 6.7% in 2011.
Of the 13 secure dividend yielding companies, eight outperformed the S&P index while five fell short. However, the average return of these stocks, including the dividend yield, was 11.1%, or approximately 9.3% higher than the S&P 500 index return and 4.4%higher than the Dow 30 return.
Note that I did not adjust the returns of the indexes or the dividend yielding companies for any measurement of risk. The average beta for this group of stocks was 0.90, suggesting relatively low volatility. However, I did not calculate the covariance of volatility compared to the index stocks.
If sluggish growth continues in 2012, then secure dividend yielding stocks should once again outperform the market benchmarks. For 2012, the companies that meet the criteria of a minimum dividend yield of 4% and at least 40% excess levered free cash flow compared to the amount of money paid out as dividends are as follows:
Pfizer
Merck
Verizon
Conoco Phillips
Hasbro
Bristol-Myers Squibb
Kimberly-Clark
Federated Investors
R.R. Donnelly
CenturyLink
Pitney-Bowes
Ventas Inc.
Whirlpool Corp.
Cablevision Systems
Supervalu Inc.
Waste Management
Lorillard Inc.
NYSE Euronext
Eli Lilly
Ameren Corp.
Leggett & Platt
Lockheed Martin
Nine of the 13 companies from last year’s list remain and are joined by nine new companies that meet the criteria. Time will tell whether these companies perform as well as their list predecessors.
