Below are several select companies with a management confident enough to increase their cash dividends:

Calamos Asset Management, Inc. (CLMS) is a globally diversified investment firm offering equity, convertible, defensive equity, fixed- income and alternative investment strategies, among others. February 3rd the company increased its quarterly dividend 27% to $0.095/share. The dividend is payable on March 4, 2011 to shareholders of record on February 18, 2011. The yield based on the new payout is 2.3%.

Aetna (AET) is one of the nation’s leading diversified health care benefits companies, serving approximately 35.4 million people. February 4th the company raised its quarterly dividend to $0.15/share, up from an annual dividend of $0.04/share. The dividend is payable on April 29, 2011 to all shareholders of record as of the close of business on April 14, 2011. The yield based on the new payout is 1.6%.

Temple-Inland Inc. (TIN) is a manufacturing company focused on corrugated packaging and building products. February 4th the company increased its quarterly dividend 18% to $0.13/share, payable March 15, 2011, to shareholders of record March 1, 2011. The yield based on the new payout is 2.2%.

Bemis Company, Inc. (BMS) is a major supplier of flexible packaging and pressure sensitive materials used by leading food, consumer products, healthcare, and other companies worldwide. February 4th the company raised its quarterly dividend 4.3% to $0.24/share. The dividend is payable on March 1, 2011, to shareholders of record at the close of business on February 15, 2011. This marks the 28th consecutive year that the Company has increased its dividend payment. The yield based on the new payout is 2.9%.

Avista Corp. (AVA) is an energy company involved in the production, transmission and distribution of energy as well as other energy-related businesses. February 4th the company increased its quarterly dividend to $0.275/share. The common stock dividend is payable March 15, 2011, to shareholders of record at the close of business on Feb. 18, 2011. The yield based on the new payout is 4.7%.

Jack Henry & Associates, Inc. (JKHY) is a leading provider of computer systems and electronic payment solutions primarily for financial services organizations. February 4th the company increased its quarterly dividend 11% to $0.105/share. The dividend is payable on March 10, 2011, to stockholders of record as of February 22, 2011. The yield based on the new payout is 1.3%.

Owens & Minor, Inc. (OMI) is a leading national distributor of name-brand medical and surgical supplies and a healthcare supply-chain management company. February 7th the company increased its quarterly dividend 13% to $0.20/share. The dividend is payable on March 31, 2011, to shareholders of record as of March 15, 2011. The yield based on the new payout is 2.6%.

Boardwalk Pipeline Partners, LP (BWP) provides interstate transportation and storage of natural gas. February 7th the partnership raised its quarterly distribution to $0.52/unit. The distribution is payable on February 24, 2011, to unitholders of record as of February 17, 2011. The yield based on the new payout is 6.3%.

Infinity Property and Casualty Corporation (IPCC) is a national provider of personal automobile insurance with a concentration on nonstandard auto insurance. February 8th the company increased its quarterly dividend 28.6% to $0.18/share. The dividend is payable on March 25, 2011 to holders of record on March 11, 2011. The yield based on the new payout is 1.2%.

Nationwide Health Properties, Inc. (NHP) is a real estate investment trust (REIT) that invests primarily in healthcare real estate in the United States. February 8th the company raised its quarterly dividend to $0.48/share. The dividend will be paid on March 4, 2011 to stockholders of record on February 18, 2011. The yield based on the new payout is 5.1%.

L-3 Communications (LLL) is a prime contractor in C3ISR (Command, Control, Communications, Intelligence, Surveillance and Reconnaissance) systems, aircraft modernization and maintenance, and government services. February 8th the company increased its quarterly dividend 12.5% $0.45/share. This is the seventh consecutive annual increase in L-3’s quarterly dividend rate. The board has also declared the next dividend payable on March 15, 2011 to shareholders of record at the close of business on March 1, 2011. The yield based on the new payout is 2.2%.

3M (MMM) operates as a diversified technology company worldwide. February 8th the company raised its quarterly dividend 5% to $0.55/share. The dividend is payable on March 12, 2011, to shareholders of record at the close of business on February 18, 2011. The yield based on the new payout is 2.5%.

The Northeast Utilities (NU) engages in the energy delivery business for residential, commercial, and industrial customers in Connecticut, New Hampshire, and western Massachusetts. February 8th the company raised its quarterly dividend to $0.275/share. The dividend is payable on March 31, 2011, to shareholders of record as of the close of business on March 1, 2011. The yield based on the new payout is 3.3%.

Wyndham Worldwide Corporation (WYN) encompasses approximately 7,210 franchised hotels and approximately 612,700 hotel rooms worldwide. February 9th the company increased its quarterly dividend 25% to $0.15/share. The yield based on the new payout is 2.0%.

Service Corporation International (SCI) is the largest provider of deathcare products and services in North America. February 9th the company increased its quarterly dividend 25% to $0.05/share. The dividend is payable on April 29, 2011 to shareholders of record at the close of business on April 15, 2011. The yield based on the new payout is 2.2%.

Diebold, Inc. (DBD) is a global leader in providing integrated self-service delivery and security systems and services. February 9th the company increased its quarterly dividend 3.7% to $0.28/share. The dividend is payable on March 7 to shareholders of record on February 21. This marks the company’s 58th consecutive annual increase. The yield based on the new payout is 3.5%.

Occidental Petroleum Corporation (OXY), the fourth largest U.S. oil and gas company, is an international oil and gas exploration and production company with operations in the United States, Middle East/North Africa and Latin America regions. February 9th the company raised its quarterly dividend 21% to $0.46 per share quarterly dividend will be payable on April 15, 2011, to stockholders of record as of March 10, 2011. Oxy has raised the dividend every year since 2002, raising it 268 percent over the period. The increase brings the company’s compound annual dividend growth rate since 2002 to 15.6 percent. Oxy has paid quarterly dividends continuously since 1975. The yield based on the new payout is 1.9%.

Thomson Reuters (TRI) is the world’s leading source of information for businesses and professionals in the financial, legal, tax and accounting, healthcare, science, and media markets worldwide. February 10th the company increased its quarterly dividend to $0.31/share. The dividend is payable on March 15, 2011 to shareholders of record as of February 22, 2011. This dividend increase marks the 18th consecutive annual dividend increase by the company. The yield based on the new payout is 3.1%.

Textainer Group Holdings Limited (TGH) is the world’s largest lessor of intermodal containers based on fleet size. February 10th the company raised its quarterly dividend 7.4% to $0.29/share. In continuing our record of providing shareholders with sizeable and increasing cash distributions, we have now raised our quarterly payout a total of seven times since going public in October 2007 for a cumulative dividend of $3.29 per common share. The yield based on the new payout is 3.4%.

AGL Resources Inc. (AGL) is an Atlanta-based energy services company, serves approximately 2.3 million customers in six states. February 10th the company raised its quarterly dividend to $0.45 per share is effective for the dividend payable March 1, 2011 to shareholders of record at the close of business on February 18, 2011. The yield based on the new payout is 4.8%.

Selecting stocks with increasing dividends is critical for an income growth strategy. The above list contains stocks that recently raised their dividends; it is not a list of recommend buys. As always, due diligence should be performed before buying or selling any stock. For a list of stocks with a long string of consecutive cash dividend increases, see this list.

Full Disclosure: Long MMM. See a list of all my income holdings here.

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This expectation does not change even when the economy turns down and earnings decline; dividend growth investors still require annual dividend growth. The companies that are able to accomplish this are those with a operating model that generates strong free cash flows with room to pay out a higher percentage as dividends. Below are several companies with a low free cash flow payout (below 40%):

An interesting twist to the above is a 2006 study conducted by Credit Suisse that found high dividend yield stocks generally
outperformed those with lower yields. However, the best returns did not come from those with the highest yields, but those with higher yields coupled with low payout ratios. The study found that high yield, low payout stocks that produced the better returns were priced at low ratios of price-to-earnings, and as a corollary, at high ratios of earnings-to-price; i.e., earnings yield. Put another way, the stocks prices were depressed, thus creating the higher yield and a value play. Below are several dividend growth stocks with a higher yields (around 4%+) and low free cash flow payouts (50% and below):

At some point we will all want to retire, but that is not to say we want our portfolio to stop working for us. A good dividend growth stock portfolio will not only provide us income in our retirement, but provide us more income each year than the one before.

Full Disclosure: Long GD, MDT, ADP, PG, INTC, ABT, GPC, TEG, CINF, LLY, HGIC. See a list of all my income holdings here.

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Dividend growth investing is not about exit points, momentum swings, relative strength, sector rotation; instead it is about studying fundamentals, selecting superior stocks and building a portfolio with a long-term horizon.  When we buy a dividend stock, we hope to hold it forever.  What makes a good dividend stock? Here are some of the things I look for:

Good Business Model

Sell things that people want or need, and do it in such a way that it is difficult or impossible for others to duplicate. There is a reason that pharmaceutical companies, such as Abbott Laboratories (ABT), are so profitable. With effective drugs under patent that sustain or enhance people’s life these companies have a deep moat. Consumer goods companies like Procter & Gamble Co. (PG) and Kimberly-Clark Corporation (KMB) manufacture products such as soap, detergent and toilet paper that we just can’t do without. Sure, there may be generic substitutes, but over the years many of these products have endeared themselves to consumers who are willing to pay a few cents more for the name brand.

Strong Free Cash Flow

Dividends are paid with cash remaining after paying the operating expenses and replacement capital (free cash flow). If a company has trouble meeting these basic needs, then its dividend is perilously at risk. Companies with a low free cash flow payout (FCF) payout are well-positioned to sustain their dividend. Such companies include: Target Corporation (TGT) at 13.85% FCF Payout, Diebold, Inc. (DBD) at 17.21%, International Business Machines Corp. (IBM) at 19.48% and Walgreen Company (WAG) at 22.71%.

Acceptable Debt Level

Generating a strong free cash flow is not enough – cash has to be available to be paid as dividends. As a result of the economic downturn, many companies are feeling pressure to reduce debt to stay within their covenants and try to maintain their debt rating. If a company’s excess cash is being used to service debt, there may not be any left over to increase dividends. Companies with a low debt to total capital include: T. Rowe Price Group Inc. (TROW) at 0.00% Debt to Total Capital, Automatic Data Processing Inc. (ADP) at 0.69%, Harleysville Group Inc. (HGIC) at 13.19% and Genuine Parts Company (GPC) at 15.76%.

Good Balance between Dividend Yield and Growth

There is usually a reason why a stock’s yield is above average. Often it is the market’s way of saying it doesn’t believe the company can maintain the dividend. Most people understand this risk. However, there is also risk to a stock that has a high dividend growth rate. To maintain a high dividend growth rate the company has to grow cash available for dividends at the same rate. This is often difficult to do. Here are several companies with a good balance between dividend yield and dividend growth rate: The Coca-Cola Company (KO) 2.94% yield and 7.32% dividend growth rate, UGI Corporation (UGI) 3.06% yield and 5.70% growth, The Clorox Company (CLX) 3.24% yield and 9.35% growth, Johnson & Johnson (JNJ) 3.31% yield and 8.42% growth and Corporate Office Properties (OFC) 4.25% yield and 5.22% growth.

For those of us that have invested in dividends for years (decades for some), we know dividend growth investing is not a passing fad to be “played” then move on the next hot investment strategy. Part of me will be glad when dividend investing falls out of favor and the masses moves on.

Full Disclosure: Long ABT, PG, ADP, HGIC, CLX, GP, JNJ, KMB, KO. See a list of all my income holdings here.

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In 2009, I devised additional criteria to apply to the Stock Ideas list in an effort to eliminate all but the the Elite Dividend Stocks. Here is the additional criteria that I came up with, along with the companies that met the criteria:

A Long Track Record Of Consecutive Dividend Increases: Aristocrats and Champions have increased their dividends for 25 consecutive years, while Achievers have done so for 10 years. The quickest way to narrow the list down was only include companies with 35 or more years of consecutive dividend increases. This reduced the number of companies to 57.

Ability To Generate Positive Free Cash Flows: To have cash available for dividends, a company must have cash left over after paying the operating expenses and normal capital expenditures. For this I looked for companies that had positive free cash flow for the last 10 years.

Free Cash Flow Sufficient To Pay The Dividend: Free cash flow can be positive, but still not enough to cover an increasing dividend. To ensure adequate coverage, I screened for companies with a 60% or less Free Cash Flow payout ratio.

Low Debt: Dividends paid out of Free Cash Flow must compete for other needs of the business such as interest and debt payments. Lower debt and interest requirements make available more cash for dividend payments. For this item, I eliminated all companies that had a debt to total capital percent in excess of 35%.

Low Risk: An Elite Dividend company should provide a superior return without subjecting your investment to undue risk. For this item, I limited the companies to those with a risk # less than 1.5.

My Elite Dividends List that started with 218 companies, then after considering all the above, it is left with the following nine companies:

This is not a buy list. As noted above, the Elite Dividend List ignores valuation and other factors you must consider before purchasing one of these companies. As we build our dividend growth portfolios, it only makes sense to build its core with the very best stocks.

Full Disclosure: Long WMT, KO, PG, JNJ, GPC. See a list of all my income holdings here.

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Dividends Provide Investment Stability

In a troubled market, dividend growth stocks provide a degree of stability to your portfolio. While everyone else is panicked about their portfolio’s decline, dividend investors see a downturn as an incredible buying opportunity. Many are now referring to the last 10 years as the lost decade. It was only lost if you were focusing on capital appreciation. Investors in dividend growth stocks continued to see their income grow over the decade.

Dividends Are Real

Unlike earnings, dividends can’t be manipulated or faked. From an accounting standpoint, it is relatively easy through fraud and manipulation to make an income statement look quite impressive. I take great comfort in a company with a strong cash flows and a consistent history of increasing cash dividends. An increasing cash dividend keeps pressure on management to ensure the company is well run. If there are too many missteps, then eventually a dividend will slip. This can be disastrous for a company’s stock price. Earnings can be manufactured, cash can not. Always follow the cash and it just might lead you to a great company. There is no faking the cash that shows up in your brokerage account.

Dividends Provide Feedback

Dividends provide continuous feedback. As time passes dividend investors see their income steadily grow. You do not have to wait five to ten years to determine if the strategy is working. Each dividend and dividend increase provides the investor with reassurance that the strategy is working.

Reinvested Dividends Drive Equity Returns

Historically, reinvested dividends provided a significant portion of equities’ returns. In Triumph of the Optimists: 101 Years of Global Investment Returns (2002), the authors looked at equity returns from capital gains and dividends from 1900 to 2000.  They determined that performance in any given year was driven by capital appreciation, but long-term returns were largely the result of reinvested dividends. Looking at 101 years of data in the U.S. and U.K., they found that a market-oriented portfolio with dividends reinvested would have generated nearly 85 times the wealth of the same portfolio relying solely on capital gains.

Good Companies Pay Dividends,
Great Companies Grow Dividends

You expect your employer to give you a raise periodically. Why wouldn’t you expect the same from your investments? We have all heard of compound interest (interest on interest), but compound dividends (dividends on growing dividends) is even more powerful.

Dividends Are Perpetual

You don’t have to cut down your income tree to enjoy a warm dividend fire. Unlike a capital gain strategy where you have to sell stocks to generate cash, spending dividends in retirement does not harm or erode your principle investment. In addition, a good dividend portfolio can be left to your children and their children.

Dividends Are Relatively Low Maintenance

You may not want to spend your retirement managing and worrying about your portfolio. Dividends from a quality, well-diversified portfolio are much more predictable than capital gains and best of all, they are passive. You don’t have to do anything, they just show up in your brokerage account each quarter. Inflation? Not to worry, the good companies routinely raise their dividends well in excess of the inflation rate. Retirement is not when you want to start learning how to invest in dividend securities. There is a degree of art to it — start young, time is always a great ally.

Dividend Growth Stocks

Below are ten dividend growth stocks that have excelled over the decades and have rewarded their shareholders with over 45 years of consecutive annual dividend increases:

Stodgy, for old people, yawn, boring! To this list you can add stable, real, effective, safer, perpetual, low maintenance, and yes, even exciting.

Full Disclosure: Long CL, JNJ, KO, MMM, PG, EMR, GPC. See a list of all my income holdings here.

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Years Of Consecutive Dividend Increases

Inertia is powerful force. Once a company has established a track record of growing its dividend over the decades and developed a shareholder base that expects higher dividends each year, it becomes increasing difficult for management to cut or fail to raise their dividend. No CEO of this type of company wants a dividend cut to occur on his or her watch. There are precious few Dividend Aristocrats remaining and those left enjoy their elite status.

Strong Financial Condition

Dividends are paid with cash, not earnings. The distinction is subtle, but very real. In its pursuit of theoretical perfection, the accounting profession has adulterated the financial statements to the point that it has become very difficult for non-accountants to interpret them. For example, 2009 was a tough year for Nucor (NUE). Its consolidated statement of earnings showed a loss of $237 million, down from 2008′s earnings of $1.8 billion. This decrease in earnings of $2 billion looks devastating until you consider flip over to the consolidated statements of cash flows and realize NUE’s management ran the business to maximize cash generation. The $2 billion decrease in earnings only equated to $688 million dollar decrease in free cash flow and while earnings were negative, free cash flow remained positive at $792 million, more than enough to cover the $443 million dividend payments.

Consider another example. In 2009 Eli Lilly’s (LLY) net earnings improved $6.4 billion, but its free cash flow decreased $2.8 billion. This oddity was primarily the result of how in-process research and development was accounted for. Here is an excerpt from their 2009 10-k describing the accounting:

Most of these acquisitions included IPR&D, which represented compounds, new indications, or line extensions under development that had not yet achieved regulatory approval for marketing. There are several methods that can be used to determine the estimated fair value of the IPR&D acquired in a business combination. We utilized the “income method”, which applies a probability weighting to the estimated future net cash flows that are derived from projected sales revenues and estimated costs. These projections are based on factors such as relevant market size, patent protection, historical pricing of similar products, and expected industry trends. The estimated future net cash flows are then discounted to the present value using an appropriate discount rate. This analysis is performed for each project independently. Pursuant to the existing rules, these acquired IPR&D intangible assets totaling $4.71 billion and $340.5 million in 2008 and 2007, respectively, were expensed immediately subsequent to the acquisition because the products had no alternative future use. The ongoing expenses with respect to each of these products in development are not material to our total research and development expense currently and are not expected to be material to our total research and development expense on an annual basis in the future.

In effect LLY realized a $4.7 billion dollar non-cash charge in 2008, which was an add-back to operating cash flow. There was no similar charge in 2009, thus the substantial increase in earnings.

When evaluating a company’s financial you must also consider competing uses for the free cash flow generated. Many companies generate significant free cash flow, but often that cash is already spoken for in the form of debt obligations. One of the key metrics I look for when evaluating a company is a debt to total capital ratio of 45% or less.

9 Stocks With a Sustainable Dividend

Using my D4L-Data spreadsheet to screen the 170+ stocks that I follow, I limited my search to stocks with the following characteristics:

- Years of consecutive dividend increases > 30 years
- Yield > 3.0%
- Debt to total capital < 45%
- Free Cash Flow Payout < 60%

Below are several stocks that meet the above criteria:

Bonus: Look For A Favorable Industry

Some industries are more stable than others. When the economy turns down and we are concerned about our job, we may discontinue our pest control or lawn service, but we will likely not stop taking our blood pressure medicine. Non-cyclical industries typically include pharmaceuticals,  utilities, defense and certain consumer goods. A company’s ability to grow its dividend is directly related to its ability to grow free cash flow.

Full Disclosure: Long ABT, ADP, GPC, JNJ, LEG, LLY, NUE, NWN. See a list of all my income holdings here.

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As for my portfolio, I consider asset allocation only when looking at my holdings in total. It would be much too difficult to maintain a good allocation within individual portfolios (income, growth, 401(k), Roth IRA, etc.), while trying to maintain my overall allocation. However, an investor could build a degree of allocation into a portfolio of dividend income securities. Consider the following:

Business Services Sector

• Automatic Data Processing Inc. (ADP)
  Yield: 3.33% | Style: Large Growth | Analysis
• C H Robinson Worldwide Inc. (CHRW)
  Yield: 1.86% | Style: Large Growth
• Expeditors International of Washington Inc. (EXPD)
  Yield: 1.16% | Style: Mid Growth

Consumer Goods Sector

• Clorox Company (CLX)
  Yield: 3.23% | Style: Mid Core
• Coca-Cola Company (KO)
  Yield: 3.04% | Style: Large Growth | Analysis
• Procter & Gamble Company (PG)
  Yield: 2.85% | Style: Large Core | Analysis

Consumer Services Sector

• Genuine Parts Company (GPC)
  Yield: 4.19% | Style: Mid Value | Analysis
• Sysco Corporation (SYY)
  Yield: 3.56% | Style: Large Core | Analysis
• McDonald’s Corporation (MCD)
  Yield: 3.22% | Style: Large Core | Analysis

Energy Sector

• BP Plc ADR (BP)
  Yield: 6.15% | Style: Large Value
• Chevron Corporation (CVX)
  Yield: 3.75% | Style: Large Value
• ExxonMobil Corporation (XOM)
  Yield: 2.56% | Style: Large Value

Financial Services Sector

• Harleysville Group Inc. (HGIC)
  Yield: 3.90% | Style: Small Value | Analysis
• Chubb Corporation (CB)
  Yield: 2.85% | Style: Large Value | Analysis
• Aflac Inc. (AFL)
  Yield: 2.38% | Style: Large Core | Analysis

Hardware Sector

• Diebold Incorporated (DBD)
  Yield: 3.67% | Style: Small Value
• Linear Technology (LLTC)
  Yield: 3.23% | Style: Mid Core
• Raven Industries Inc. (RAVN)
  Yield: 1.90% | Style: Small Growth | Analysis

Health Care Sector

• Meridian Bioscience Inc. (VIVO)
  Yield: 3.27% | Style: Small Growth
• Johnson & Johnson (JNJ)
  Yield: 3.08% | Style: Large Core | Analysis
• Cardinal Health Inc. (CAH)
  Yield: 2.10% | Style: Large Core | Analysis

Industrial Materials Sector

• Nucor Corp. (NUE)
  Yield: 3.40% | Style: Large Core | Analysis
• Emerson Electric Co. (EMR)
  Yield: 2.90% | Style: Large Core | Analysis
• 3M Company (MMM)
  Yield: 2.58% | Style: Large Core

Media Sector

• McGraw-Hill Companies Inc. (MHP)
  Yield: 2.63% | Style: Large Core

Pharmaceuticals Sector

• Eli Lilly & Company (LLY)
  Yield: 5.77% | Style: Large Value
• Abbott Laboratories (ABT)
  Yield: 2.97% | Style: Large Growth | Analysis

Real Estate Sector

• Essex Property Trust (ESS)
  Yield: 5.14% | Style: Mid Core
• Corporate Office Properties Trust Inc. (OFC)
  Yield: 4.29% | Style: Mid Core
• Federal Realty Investment Trust (FRT)
  Yield: 4.06% | Style: Mid Core

Telecommunications Sector

• CenturyLink Inc. (CTL)
  Yield: 8.10% | Style: Large Value
• AT&T Inc. (T)
  Yield: 6.54% | Style: Large Value | Analysis

Utilities Sector

• Integrys Energy Group Inc. (TEG)
  Yield: 6.61% | Style: Mid Value
• Consolidated Edison Company (ED)
  Yield: 5.59% | Style: Large Value
• MGE Energy Inc. (MGEE)
  Yield: 4.45% | Style: Small Core

Bonds

• Vanguard Short-Term Bond ETF (BSV)
  Yield: 2.74% | Style: Short-Term Bond
• Vanguard Intermediate-Term Bond ETF (BIV)
  Yield: 4.32% | Style: Intermediate-Term Bond
• Vanguard Long-Term Bond ETF (BLV)
  Yield: 5.16% | Style: Long-Term Bond

Needless to say, the above will not provide a perfect allocation, but it goes a long way to provide diversity in a portfolio focused only on income securities. In my personal portfolio, I buy the best available dividend securities and use my other investments to balance my asset allocation.

Full Disclosure: Long ABT, ADP, AFL, BIV, BLV, BP, CLX, CTL, CVX, ED, EMR, GPC, HGIC, JNJ, KO, LLY, MCD, MMM, NUE, PG, SYY, T, TEG. See a list of all my income holdings here.

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Here is a list of notable participants:

Commerce Bancshares (CBSH) banks provide services to individuals and businesses via 217 branches and 404 ATMs in Missouri, Kansas, Illinois, Oklahoma and Colorado February 5th the company increased its quarterly dividend 3% to $0.235/share. The dividend is payable on March 26, 2010, to stockholders of record at the close of business on March 10, 2010. The ex-dividend date is March 8. CBSH is a Dividend Achiever and has raised its dividend for 42 consecutive years. The yield based on the new payout is 2.49%.

Boardwalk Pipeline Partners (BWP) engages in the interstate transportation and storage of natural gas. February 5th the company bumped its quarterly distribution to $0.50/unit. The distribution is payable on February 22, 2010, to unitholders of record as of February 15, 2010. The ex-distribution date is February 11, 2010. The yield based on the new payout is 6.66%.

Temple-Inland (TIN) is a major producer of corrugated containers and containerboard. February 5th the company boosted its quarterly dividend 10% to $0.11/share. The dividend is payable March 15, 2010, to shareholders of record March 1, 2010. The ex-dividend date is Feb 25th. The yield based on the new payout is 2.59%.

Compass Minerals (CMP) produces salt for highway deicing and general trade. February 8th the company raised its quarterly dividend 10% to $0.39/share. The dividend is payable March 15, 2010, to shareholders of record as of the close of business on March 1, 2010. The ex-dividend date is February 25, 2010. The yield based on the new payout is 2.39%.

Mercury General (MCY) is an insurance holding company operating primarily in California. February 8th the company increased its quarterly dividend 2% to $0.59/share. The dividend is to be paid on March 31, 2010 to shareholders of record on March 16, 2010. The ex-dividend date is March 12, 2010. MCY is a Dividend Achiever and has raised its dividend for 23 consecutive years. The yield based on the new payout is 6.10%.

Jack Henry (JKHY) provides integrated computer systems, software and services addressing the information technology and data processing needs of banks and credit unions. February 8th the company bumped its quarterly dividend 12% to $0.095/share. The cash dividend on its common stock, par value $.01 per share, is payable on March 9, 2010, to stockholders of record as of February 24, 2010. The ex-dividend date is February 22. JKHY is a Dividend Achiever and has raised its dividend for 18 consecutive years. The yield based on the new payout is 1.77%.

United Technologies (UTX) is an aerospace-industrial conglomerate with a portfolio including Pratt & Whitney jet engines, Sikorsky helicopters, Otis elevators and Carrier air conditioners, among other products. February 8th the company boosted its quarterly dividend 10% to $0.425/share. The dividend is payable March 10 to shareowners of record at the close of business Feb. 19. The ex-dividend date is Feb. 17. UTX is a Dividend Achiever and has raised its dividend for 18 consecutive years. The yield based on the new payout is 2.60%. [Analysis]

Owens & Minor (OMI) is a leading domestic distributor of medical and surgical supplies to the acute care market. February 8th the company raised its quarterly dividend 15% to $0.265/share. The record date for the stock split and the cash dividend is March 15, 2010. The cash dividend will be payable on March 31, 2010. OMI is a Dividend Achiever and has raised its dividend for 11 consecutive years. The yield based on the new payout is 2.15%.

Nu Skin (NUS) develops and distributes personal care products and nutritional supplements. February 9th the company increased its quarterly dividend 9% to $0.125/share. The dividend will be paid on March 17, 2010, to shareholders of record on Feb. 26, 2010. The yield based on the new payout is 1.93%.

Avon Products (AVP) is the world’s leading direct marketer of cosmetics, toiletries, fashion jewelry, and fragrances, with more than 5 million sales representatives worldwide. February 9th the company bumped its quarterly dividend 5% to $0.22/share. The dividend is payable March 1, 2010, to shareholders of record February 23, 2010. The ex-dividend date is February 19, 2010. AVP is a Dividend Achiever and has raised its dividend for 21 consecutive years. The yield based on the new payout is 3.00%.

Northeast Utilities (NU) is a utility holding company serves Connecticut, western Massachusetts and New Hampshire. February 9th the company raised its quarterly dividend to $0.25625/share. The dividend is payable March 31, 2010, to shareholders of record as of the close of business on March 1, 2010. The yield based on the new payout is 4.06%.

American Science and Engineering (ASEI) develops, manufactures, markets, and sells X-ray and other inspection solutions primarily for homeland security markets. February 9th the company increased its quarterly dividend to $0.30/share. The dividend is payable on March 4, 2010 to shareholders of record at the close of business on February 22, 2010. The ex-dividend date is February 18, 2010. The yield based on the new payout is 1.61%.

Corporate Executive Board (EXBD) provides corporate executives and professionals with the insights and resources necessary to excel in their roles and to drive corporate performance. February 9th the company bumped its quarterly dividend to $0.11/share. The yield based on the new payout is 2.01%.

3M (MMM) has operations in electronics, health care, industrial, consumer, office, telecommunications, safety and security and other markets. February 9th the company boosted its quarterly dividend 3% to $0.525/share. The dividend is payable on March 12, 2010, to shareholders of record at the close of business on February 19, 2010. The ex-dividend date is February 17, 2010. MMM is a Dividend Aristocrat and has raised its dividend for 52 consecutive years. The yield based on the new payout is 2.62%.

Infinity Property and Casualty (IPCC) provides, through its subsidiaries, personal automobile insurance with a concentration on nonstandard auto insurance. February 9th the company raised its quarterly dividend 17% to $0.14/share. The dividend is payable on March 26, 2010 to holders of record on March 12, 2010. The yield based on the new payout is 1.47%.

Wyndham (WYN) operations include the sale of interests in vacation ownership resorts; facilitating the exchange and rental of access to vacation properties; and the franchising of hotels. February 10th the company bumped its quarterly dividend to $0.12/share. The yield based on the new payout is 2.12%.

Sigma-Aldrich (SIAL) makes and sells a wide range of biochemicals, organic chemicals, and chromatography products. February 10th the company raised its quarterly dividend 10% to $0.155/share. SIAL is a Dividend Aristocrat and has raised its dividend for 34 consecutive years. The yield based on the new payout is 1.33%.

CSX (CSX) a major U.S. rail network, transporting bulk commodities, industrial products and intermodal containers. February 10th the company boosted its quarterly dividend 9% to $0.24/share. The dividend is payable on March 15, 2010 to shareholders of record at the close of business on February 26, 2010. The ex-dividend date is Feb. 24. The yield based on the new payout is 2.13%.

Diebold (DBD) develops, makes, and services self-service transaction systems, electronic and physical security systems. February 11th the company raised its quarterly dividend 4% to $0.27/share. The dividend is payable on Monday, March 8, to shareholders of record at the close of business on Monday, Feb. 22. The ex-dividend date is Feb. 18. DBD is a Dividend Achiever and has raised its dividend for 57 consecutive years. The yield based on the new payout is 3.87%.

SCANA Corp. (SCG) provides electric, natural gas, and telecommunications services. February 11th the company increased its quarterly dividend 1.1% to $0.475/share. The dividend is payable April 1, 2010 to shareholders of record at the close of business on March 10, 2010. The ex-dividend date is March 8, 2010. The yield based on the new payout is 5.43%.

First quarter is an exciting time for dividend growth investors as many companies elect to announce their annual dividend increases during this time. For a list of stocks with a long string of consecutive cash dividend increases, see this list.

Full Disclosure: Long MMM, UTX. See a list of all my income holdings here.

(Photo Credit)

Dividend payout is expressed as a percentage and is calculated by dividing annual dividend per share by annual earnings per share (EPS). This tells the investor what percentage of earning the company is paying out as a dividend. At first blush this may seem to make a lot of sense, but it suffers from the following potential problems:

I. Earnings Does Not Equal Cash

As an accountant, I can tell you our profession in its pursuit of theoretical perfection has adulterated the financial statements to the point that it has become very difficult for non-accountants to understand what’s behind the numbers.  Accounting pronouncements such as SFAS No. 143 “Accounting for Asset Retirement Obligations” (ARO) that requires a company to recognize expenses today for cash payments that may not occur for decades or even centuries widens the gap between earnings and cash. Applying “fair value” principles allowed under GAAP, financial institutions (and others) can mark to market debt on their books and create non-cash income or expense, depending on the direction of interest rates. Many point to mark to market accounting as one of the major contributors to the 2008 financial melt-down.

II. Quality of Earnings

Would you rather a company that you are invested in to increase its earnings by 1.) increasing sales and holding cost down or 2.) sell a fully depreciated plant. Obviously, you would rather have the former since it has the possibility of being duplicated over and over again. You can only sell a specific asset once. In addition to cash and non-cash earnings, a statement of earnings also contains operating and non-operating earnings.

A Better Dividend Payout Calculation

A dividend payout ratio is supposed to provide the investor with an indication of how much cash as a percent of earnings the company is paying its investors. As you can see from the above discussion, a payout ratio based on GAAP net earnings could potentially have a lot of noise in it and not provide a clear picture of the economic condition of the business.

What the investor is really wanting to know is what percentage of cash is the company paying as a percentage of cash generated from running the business. The irony here is that operating cash is readily available on the Statement Of Cash Flows in the Operating section. This section focuses on the cash generated by running the business. It excludes cash generated by selling pieces of the business – these are shown in the investing section. It also excludes cash generated from selling stock or issuing debt – these are shown in the financing section.

In calculating a payout ratio, I prefer Free Cash Flow over Operating Cash Flow. Free Cash Flow is Operating Cash Flow less normal capital expenditures (normally the first line in the investing section). For a business to remain viable, it must replace capital assets when they wear out.

The formula for Free Cash Flow Payout is simply Annual Dividend Per Share divided by Free Cash Flow Per Share. I like to see a percentage of 70% or less. The 70% is somewhat higher than many people look for with a traditional payout ratio. I am comfortable with the higher number since we are talking about real cash generated from running the business vs. accounting earnings that may or may not be there. So how do the two ratios compare?

Needless to say, the variances are all over the place. In many companies I looked at the traditional dividend payout ratio was within 10 percentage points higher than a free cash flow payout. This means the GAAP earnings was lower than the calculated Free Cash Flow. Here are some example of this situation:

• Chubb Corp (CB) – Traditional: 28% – FCF Payout: 21% – Analysis
• Clorox Company (CLX) – Traditional: 50% – FCF Payout: 50%
• Emerson Electric Co. (EMR) – Traditional: 53% – FCF Payout: 45% – Analysis
• Family Dollar Stores Inc. (FDO) – Traditional: 25% – FCF Payout: 22%
• Hormel Foods Corp. (HRL) – Traditional: 34% – FCF Payout: 33%
• International Business Machines (IBM) – Traditional: 23% – FCF Payout: 18%
• 3M Co. (MMM) – Traditional: 50% – FCF Payout: 45% – Analysis
• Microsoft Corp. (MSFT) – Traditional: 32% – FCF Payout: 29%
• SYSCO Corporation (SYY) – Traditional: 52% – FCF Payout: 48% – Analysis
• United Technologies Corp. (UTX) – Traditional: 35% – FCF Payout: 30% – Analysis

Sometime the gap is much larger. This could have resulted from significant non-cash charges on the income statement.  Companies with large gaps include:

• Aflac Incorporated (AFL) – Traditional: 44% – FCF Payout: 10% – Analysis
• CenturyLink Inc. (CTL) – Traditional: 87% – FCF Payout: 46%
• Diebold Inc (DBD) – Traditional: 74% – FCF Payout: 30%
• Illinois ToolWorks Inc. (ITW) – Traditional: 76% – FCF Payout: 31% – Analysis
• Leggett & Platt Inc. (LEG) – Traditional: 262% – FCF Payout: 34% – Analysis
• Nucor Corporation (NUE) – Traditional: 88% – FCF Payout: 29% – Analysis
• Pitney Bowes Inc. (PBI) – Traditional: 73% – FCF Payout: 38%
• PPG Inds Inc (PPG) – Traditional: 158% – FCF Payout: 48%
• RLI Corp (RLI) – Traditional: 158% – FCF Payout: 48% – Analysis
• RPM International Inc (RPM) – Traditional: 84% – FCF Payout: 49% – Analysis
• AT&T Inc. (T) – Traditional: 81% – FCF Payout: 49%

Sometimes the gap is not only large, but goes the other way. This is potentially the most dangerous since focusing on the traditional dividend payout may lead you to believe the dividend is covered better than it actually is. Examples of this situation would include:

• Air Products and Chemicals Inc. (APD) – Traditional: 56% – FCF Payout: 172%
• Franklin Resources Inc. (BEN) – Traditional: 23% – FCF Payout: 48%
• BP Plc (BP) – Traditional: 50% – FCF Payout: 114% – Analysis
• Lowe’s Companies, Inc. (LOW) – Traditional: 27% – FCF Payout: 57% – Analysis
• Exxon Mobil Corp (XOM) – Traditional: 27% – FCF Payout: 54%

Although Free Cash Flow Payout is a better payout ratio than the traditional dividend ratio, the investor should look at both and understand the differences. Taking an expense for impairing goodwill is much different than recognizing an expense for losing a lawsuit. The former will not directly involve cash out the door, but the latter will if the company loses on appeal.

Full Disclosure: Long CLX, EMR, MMM, SYY, UTX, AFL, CTL, ITW, NUE, BP. See a list of all my income holdings here.

(Photo Credit)

#10. Integrys Energy Group (TEG) – 51 Years

This utility holding company serves about 485,000 regulated electric and 1,674,000 regulated gas customers. The company also operates an unregulated energy supply and services business. Yesterday, TEG increased its quarterly dividend 1.5% to $0.68. The current yield is 6.81%.

#9. 3M Company (MMM) – 51 Years

This diversified global company has operations in electronics, health care, industrial, consumer and office, telecommunications, safety and security, and other markets. Last week MMM declared a 2% quarterly dividend increase to $0.54/share. The current yield is 4.13%.

#8. Emerson Electric (EMR) – 52 Years

This company primarily makes backup power equipment for telecom and Internet providers and users, climate control components, and electric motors. EMR last increased its quarterly dividend 10% in November 2008. The current yield is 4.12%.

#7. Parker-Hannifin Corp. (PH)- 52 Years

This company is a global maker of industrial pumps, valves and hydraulics. Its products are used in everything from jet engines to trucks and autos and utility turbines. PH last increased its quarterly dividend 19% in November 2008. The current yield is 2.46%.

#6. Procter & Gamble Co. (PG) – 52 Years

This leading consumer products company markets household and personal care products in more than 180 countries. PG last increased its quarterly dividend 14% in April 2008. The current yield is 3.13%

#5. Genuine Parts Co. (GPC) – 53 Years

This company is a leading wholesale distributor of automotive replacement parts, industrial parts and supplies, and office products. GPC last increased its quarterly dividend 7% in March 2008. The current yield is 4.83%

#4. Northwest Natural Gas (NWN) – 53 Years

This U.S. gas distribution utility serves Oregon and southwest Washington. NWN last increased its quarterly dividend 5% in October 2008. The current yield is 3.60%

#3. Dover Corp. (DOV) – 53 Years

This company manufactures a broad range of specialized industrial products and sophisticated manufacturing equipment. DOV last increased its quarterly dividend 25% in August 2008. The current yield is 3.37%

#2. American States Water (AWR) – 54 Years

This utility primarily serves water customers in California, as well as in Arizona. It also provides electric service to a small section of San Bernardino County. AWR has not increased its dividend since November 2007. If it remains flat during 2009, AWR will lose its spot on this list. The current yield is 2.73%

And finally, the defending national champion of dividend increases…

#1. Diebold Inc. (DBD) – 55 Years

This company develops, makes, and services self-service transaction systems, electronic & physical security systems, and software used to equip bank facilities, voting terminals. This month DBD increased its quarterly dividend 4% to $0.26/share to keeps its streak alive. The current yield is 4.20%.

Earlier this month there were 11 companies eligible for this list. Unfortantely, Masco (MAS) cashed in a half century of excellence and cut its dividend.

This list is a great starting point for additional analysis. Over the next several weeks, I plan on prescreening those on the list I had not previously looked at. If any look promising, I will provide a more comprehensive evaluation in the future.

Full Disclosure: Long TEG, PG