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When we asked MarketWatch readers if they were looking for income in an article about closed-end funds that invest in energy partnerships, the response was tremendous.
Readers have, shall we say, a certain passion, both for and against that volatile sector. So we’re now taking a more traditional approach to a “first screen” of dividend stocks you might want to consider.
Before showing you this new list of dividend stocks, it’s important to point out that it’s just a top-level screen, or analysis. This means you have to do your own research — preferably with the assistance of a broker or investment adviser — if you are interested in any of the stocks on the list. What’s key is that a company must be successful for many years.
Here’s how we pared the benchmark S&P 500 Index SPX, +0.33% to a list of 19 dividend stocks, using data supplied by FactSet.
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• Dividend yield of at least 3.5%. That may not seem high, but even after rising roughly 57 basis points over the past year, the yield on 10-year U.S. Treasury note TMUBMUSD10Y, +1.55% is only about 2.4%.
• A free cash flow yield for the past 12 months that’s higher than the current dividend yield. A company’s free cash flow is its remaining cash flow after planned capital expenditures. This money can be used to raise dividends, repurchase shares, make acquisitions or for other corporate purposes. If the free cash flow yield is higher than the dividend yield, the company has “headroom” to raise its dividend, or to do something else that (hopefully) benefits shareholders. For most real estate investment trusts, we used funds from operations (FFO) to calculate free cash flow yields.
• Growth of sales per share over the past 12 months from the previous 12-month period (assuming the data are available). We focused on sales per share, rather than top-line revenue, because the per-share figures reflect any dilution to investors from the issuance of stock.
• Growth of sales per share for the most recent quarter, compared with a year earlier. This may seem less important than the 12-month growth figure. However, if a company experiences a sea change in its business, and year-over-year sales are down significantly, you can be sure of seeing another three quarters of negative headlines, as the financial media continue making year-over-year comparisons.
• No cuts in regular dividends for at least five years. If you are holding shares of a company that is known for its big dividend, and the payout is cut for any reason, the results are usually painful.