What are we looking for?
Large cap U.S.-listed stocks with good dividend yields and strong dividend track records.
The swoon in the U.S. markets driven by the plunging price of oil has driven up prices of U.S. Treasuries and has many market watchers speculating on a delay in the Federal Reserve's expected time frame to begin raising interest rates. A continued low interest rate environment would be good news for dividend paying stocks whose yields would look more attractive compared to their interest paying counterparts.
The screen
We will be using Recognia Strategy Builder to search for the most promising dividend stocks.
We begin by setting a minimum market cap threshold of $10-billion (U.S.). We wish to focus on larger, more established companies in the U.S. market due to their inherent quality and stability.
Next, we will use three dividend-related criteria to select our dividend all-stars. First, we will select only companies with dividend yields of 3 per cent or more. Ensuring our selections are able to maintain their dividend payouts is also important – we will screen for companies with a dividend coverage ratio of at least 250 per cent. Dividend coverage is defined as the earnings per share over the past year divided by the dividend paid in the same period. A higher dividend coverage ratio is preferred as it means more earnings are available to maintain or even raise the dividend.
Finally, we will look for companies with a track record of raising their dividend payments over time. We will look for a five-year average dividend growth rate of at least 3 per cent per year.
What did we find?
Ford Motor Co. ranks No. 1 on our list with a market cap of $54.2-billion. In 2014, the North American auto industry experienced its best November sales in the past decade. Ford currently pays a 3.5 per cent dividend and has a dividend coverage ratio of 455 per cent and should continue to perform well into the current economic recovery.
Calgary-based Agrium is one of North America's largest suppliers of agricultural chemicals and fertilizers. Third-quarter results issued in November were mixed with the company beating expectations on earnings but missing slightly on revenue. Agrium currently has dividend yield of 3.3 per cent and a strong track record of dividend growth.
Seagate Technology is one of the world's largest makers of computer storage devices. It enjoys a near duopoly with competitor Western Digital for traditional hard drives. Seagate makes our list of dividend all-stars at position No. 3 with a dividend yield of 3.3 per cent and a dividend coverage ratio of 279 per cent.
More about Recognia
Recognia is a global leader in quantitative and technical analysis. It is accessible by more than 20 million investors and traders worldwide through leading retail online brokers. Recognia covers 85 exchanges worldwide, and analyzes 72,000 instruments daily including stocks, indexes, ETFs, currencies and futures.
Historical performance
Recognia Strategy Builder provides a backtesting capability to evaluate how well an investing strategy would have worked in the past. Using a five-year historical period with quarterly rebalancing, the screen described had a 12.7 per cent annualized return compared to 10.8 per cent for the Dow Jones industrial average.
The investment ideas presented here are for information only. They do not constitute advice or a recommendation by Recognia Inc. in respect of the investment in financial instruments. Investors should conduct further research before investing.
Peter Ashton is vice-president of retail and self-directed investing at Recognia Inc.