Over the last 85 years, approximately 33% of total equity returns realized by market participants can be attributed to dividends. Standard and Poor's takes note of the 60 highest dividend paying stocks within the S&P Composite 1500 index, which have followed a regular schedule of increasing payouts for over 25 consecutive years.
TUTORIAL: Economic Indicators To Know
The resulting total return index, coined the "S&P High Yield Dividend Aristocrats", provides guidance regarding some of the most stable income-generating securities used in the construction of a dividend growth portfolio. On a risk-adjusted basis, the S&P High Yield Dividend Aristocrats have outperformed the broad market, producing a three-year Sharpe ratio of 0.0539, in contrasts to the S&P's -0.0135.
Invest in Energy
Unlike most dividends indices which extensively focus on the utilities and financial sectors, these two components only comprise only 29.2% of this elite group. Utilities, such as UGI Corp. (NYSE:UGI) and Atmos Energy (NYSE:ATO) which yield 3.30% and 4.20%, respectively, tend to be slow growth companies, limiting the potential of capital gains. On the other hand, financials, such as Westamerica Bancorp (Nasdaq:WABC) and Commerce Bancshares (Nasdaq:CBSH), which yield 2.9% and 2.20% respectively and also find themselves on the high yield aristocrats list, tend to be rather volatile. The energy sector provides an ideal balance between these two alternatives.
Three energy plays are found within the S&P High Yield Dividend Aristocrats list of top 60 stocks: Chevron (NYSE:CVX), Exxon Mobile (NYSE:XOM) and Questar (NYSE:STR).
Chevron, Exxon, Questar
On April 27, 2011, the Chevron board of directors increased the payable dividend to common shareholders by 8.3% to 78 cents. This oil giant has been regularly paying dividends for 99 years and managed to increase its payout consistently for the last 17, to its current level where shares provide a yield of 3.03%. Despite its strong annual dividend growth, earnings per share have actually been rising at a faster rate.
For its second quarter, ExxonMobil raised its dividend from 44 cents to 47 cents, shifting its dividend yield to 2.31%. Over the last 27 years, even through the Great Recession, the distributions paid out to shareholders have increased by an average 5.7%, while its payout ratio has actually been decreasing. Similar to Chevron, ExxonMobil has a solid 129-year track record of uninterrupted dividend payments.
Perhaps not as well-known as ExxonMobil and Chevron, Questar offers a superior yield of 3.44%, distributing 15.25 cents per share quarterly. Questar's board declared the company's 266th consecutive dividend payment on May 10, 2011, following February's 9% common-stock dividend increase. February marked the 38th rise in income distributions within the last 39 years.
The Bottom Line
Although the Securities and Exchange Act of 1934 heightened the transparency of the stock market, dividend growth firms indirectly signal solid fundamentals often not reflected in the financials. In addition to such signals, dividends provide a much desired income stream to boost total investment returns. As John D. Rockefeller once said, "the only thing that gives me pleasure? It's to see my dividends coming in." (Find out how a company can put its profits directly into your hands. Check out How Dividends Work For Investors.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!