Dividend companies 'I'll never have to sell'

As the lead manager of the Franklin U.S. Rising Dividends Fund, Don Taylor can sum up his mission in a couple of sentences.

"I'm really trying to find companies that I think I'll never have to sell," he says. "That's the ideal."

The reality, however, is that the recession is making it harder to find stocks with rising dividends. Of the 7,000 U.S. companies that report dividend information to Standard & Poor's, a record low of 233 increased their dividends in the second quarter, down 49 per cent from a year earlier. Those that cut their dividends more than doubled to 250 - the highest since 1957.

But even as the number of dividend growers shrinks, 85 per cent of the stocks in Mr. Taylor's fund have raised their dividends in the past year, and nearly three-quarters have done so since the financial crisis blew up last September.

When looking for stocks that will keep the dividend hikes coming, Mr. Taylor screens for five factors:

• The company must have raised its dividend in at least eight of the past 10 years, with no dividend cuts.

• The dividend must have at least doubled over the past 10 years.

• The company's long-term debt to total capital must be 50 per cent or less, and if the debt is rated, it must be investment grade. These screens are designed to focus on companies whose cash flow can support dividend increases, rather than going to service debt.

• The payout ratio - dividends as a percentage of profit - must be less than 65 per cent, and ideally less than 40 per cent.

• To prevent overpaying, the price-to-earnings multiple must be in the lower half of its range over the past 10 years.

For all the headlines about dividend cuts, Mr. Taylor says there are still plenty of companies - especially outside the hard-hit financial sector - that are increasing their payments to shareholders. Here are five U.S. stocks that are bucking the dividend-cut trend:

Wal-Mart Stores Inc.

Even as other retailers struggle, Wal-Mart is posting same-store sales increases as shoppers trade down to lower-priced merchandise. As it expands internationally, it is also gobbling up market share in North America with its sprawling Supercenters that include a discount store and supermarket under one roof.

With 35 consecutive years of dividend increases - the most recent was a 15-per-cent hike in March - and a 31-per-cent payout ratio, investors can count on double-digit dividend growth for many more years, Mr. Taylor says. And the stock has dropped recently, making this an attractive entry point.

Family Dollar Stores Inc.

The best-performing stock in the S&P 500 last year, Family Dollar's shares have also struggled as investors gravitate to higher-risk plays. But with 33 years of dividend increases under its belt, a payout ratio of just 26 per cent and several states - including California - left to conquer, the operator of small discount stores should serve dividend investors well.

United Technologies Corp.

With a portfolio of products that includes Otis elevators, Pratt & Whitney aircraft engines and Carrier heating and cooling systems, you might think United Technologies has been hit hard by the global recession. And you'd be right.

But its strong presence in Asia and recurring revenue from its service businesses are helping to cushion the downturn. The company's conservative payout ratio of 38 per cent likely means it can continue increasing its dividend, although at a slower pace than before, until the economy picks up.

Praxair Inc.

Praxair sells industrial gases, from oxygen used in chemical manufacturing to xenon used in medical imaging. It's also a player in the energy industry, supplying gases to refiners and oil sands producers.

But what's really a gas is its 16-year track record of dividend growth. In fact, over the past five years its dividend has increased at a sizzling 23.3-per-cent annual pace. One reason for those increases is that Praxair operates in an industry dominated by four large players, "and the competitors aren't cutthroat, so they haven't tended to have a lot of price competition, even in this downturn," Mr. Taylor says.

Becton Dickinson and Co.

If getting a needle makes you squeamish, you'll hate Becton Dickinson, which sells medical supplies including syringes, exam gloves, IV catheters, surgical accessories and scores of other products.

But as an investor, you'll love the company's 36-year track record of dividend growth. Because it specializes in small-ticket items, which are less vulnerable to economic downturns and health care cost cutting, "this environment has hardly affected them at all," Mr. Taylor says.