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What are we looking for?

Financially healthy stocks on the S&P 500 with a history of consistent dividend growth.

The screen

Although the U.S. stock market has rebounded dramatically from lows in March, many dividend-paying companies continue to experience financial distress. More than 50 stocks on the S&P 500 index have either suspended or slashed their dividend this year. That is a considerable increase compared with 2019, when only 11 companies paid a lower annual dividend than the previous year, and no company suspended dividends. However, many companies in strong financial positions have weathered the storm and increased their annual dividend payout in 2020 despite the challenging economy.

Today I use Morningstar CPMS to look for stocks that exhibit consistent dividend growth, a low dividend-to-earnings payout ratio, and a high Morningstar quantitative health score (a proprietary measure indicating a company’s financial health based on the firm’s leverage. A higher score indicates a stronger company with less likelihood of falling into financial distress.) Financially stable companies with reliable dividend increases should be a worthwhile consideration for prudent and risk-averse investors in a balanced portfolio.

Specifically, we screened for S&P 500 stocks that met the following screening criteria:

  • Annual dividend growth every year for at least the past five years;
  • Dividend payout ratio on earnings of less than 70 per cent;
  • Morningstar quantitative financial health score of at least 70 out of 100;
  • Dividend yield of at least 1 per cent.

Select S&P 500 dividend growth stocks

CompanyTickerSectorMkt. Cap. (US$ Mil.)5Y Div. Grth. Rate (%)Payout Ratio (%)Quant. Fin. Health Score (%)Div. Yid. (%)1Y Ttl. Rtn. (%)Recent Close (US$)
Citigroup Inc.C-NFinancial Serv.122,960.553.234.0763.5-21.959.06
Citizens Financial GroupCFG-NFinancial Serv.14,610.242.854.2714.6-11.334.21
Charles Schwab Corp.SCHW-NFinancial Serv.93,552.834.130.3821.49.351.98
Regions Financial Corp.RF-NFinancial Serv.14,656.428.342.6734.1-8.215.26
KeyCorpKEY-NFinancial Serv.15,057.224.655.0724.8-20.115.42
A. O. Smith Corp.AOS-NIndustrials7,535.321.544.0771.919.655.64
Hormel Foods Corp.HRL-NCons. Defensive25,883.711.856.0802.09.347.94
Jack Henry & Assoc.JKHY-QTechnology12,335.011.745.4741.111.8161.63
Accenture PLCACN-NTechnology176,
Microsoft Corp.MSFT-QTechnology1,652,648.99.533.0721.041.7218.59
Cisco Systems Inc.CSCO-QTechnology192,
Clorox Co.CLX-NCons. Defensive25,609.69.055.2712.237.0203.17
Church & Dwight Co Inc.CHD-NCons. Defensive21,900.98.131.5721.128.288.15
Merck & Co Inc.MRK-NHealth care201,213.67.941.0713.3-8.979.53
Tiffany & Co.TIF-NCons. Cyclical15,917.37.853.6741.80.0131.10
Expeditors Int'l of Wash.EXPD-QIndustrials16,147.97.725.5821.126.095.40
Johnson & JohnsonJNJ-NHealth care406,754.26.245.1752.69.0154.51
AmerisourceBergen Corp.ABC-NHealth care20,
CH Robinson WorldwideCHRW-QIndustrials12,588.64.348.6712.223.392.60
Procter & Gamble Co.PG-NCons. Defensive344,764.43.956.9722.313.8139.04

Morningstar CPMS

More about Morningstar

Morningstar Research Inc. provides independent investment research in North America, Europe, Australia and Asia. Its research tool, Morningstar CPMS, provides quantitative North American equity research and portfolio analysis to institutional clients and financial advisers. CPMS data cover more than 95 per cent of the investable North American stock market.

What we found

I used CPMS to back-test the strategy from January, 2008, to November, 2020. During this process, a maximum of 20 stocks in the S&P 500 were purchased and equally weighted at the start of each calendar year with a maximum of five stocks per sector to prevent overexposure to one sector. Stocks would be sold if their expected dividend yield fell below 1 per cent, their payout ratio rose above 90 per cent, or their quantitative financial health score fell below 50. The portfolio, which is ranked by the five-year annual dividend growth rate, is rebalanced monthly, and stocks reselected annually. Over this period, the strategy produced an annualized total return of 10 per cent while the Morningstar Dividend Leaders Total Return Index advanced 7.5 per cent. Today, 20 stocks qualify for purchase into the strategy and are listed in the accompanying table.

As always, investors are encouraged to conduct their own independent research before purchasing any of the investments listed here.

Michael Pe, CFA, is a product manager for CPMS at Morningstar Research Inc.

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Tickers mentioned in this story

Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 19/04/24 4:00pm EDT.

SymbolName% changeLast
Citigroup Inc
The Charles Schwab Corp
Citizens Financial Group Inc/Ri
Regions Financial Corp
Smith A.O. Corp
Accenture Plc
Jack Henry & Assoc
Microsoft Corp
Cisco Systems Inc
Clorox Company
Church & Dwight Company
Merck & Company
Johnson & Johnson
C.H. Robinson Ww
Procter & Gamble Company

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