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What are we looking for?

Well-established U.S. dividend stocks.

The screen

With the U.S. market housing a vast offering of companies to invest in, it’s no wonder investors can get overwhelmed by the choices available. Many people feel a certain sense of comfort investing in companies with familiar, well-established names. Typically, the most recognizable of these tend to be the larger companies; they are likely to have more frequent media coverage and have products or services commonly used by the average person. In the United States, we can use the S&P 500 as a good representation of these better-known companies.

Today, I’m going to showcase a strategy that invests in U.S. dividend stocks within the S&P 500. The strategy ranks stocks based on:

  • Five-year dividend growth rate, or annualized dividend growth over the past five years – high values are preferred;
  • Dividend yield, a measure of what a company is expected to pay in dividends across the next 12 months divided by the stock’s most recent share price;
  • Five-year beta, which measures a stock’s sensitivity relative to a specified benchmark (in the case, the S&P 500). For example, a stock with a beta of one indicates the stock has a similar risk/return profile as the benchmark – lower values are preferred.

In order to qualify, stocks must have a dividend yield greater than or equal to 2 per cent; a dividend payout ratio (how much a company is expected to payout in dividends relative to their earnings) less than or equal to 60 per cent; and a three-month earnings-per-share estimate revision (the change of EPS estimates three months ago relative to EPS estimates today) greater than or equal to minus 5 per cent.

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. With more than 120 equity and credit analysts, Morningstar has one of the largest independent institutional equity research teams in the world.

What we found

I used Morningstar CPMS to back-test this strategy from December, 1993, to April, 2019. During this process, a maximum of 15 stocks were purchased. No more than five stocks per economic sector could be held at any time. Stocks were sold if their dividend yield dropped below 1 per cent or if their dividend payout ratio went above 80 per cent. When sold, the positions were replaced with the highest-ranked stock not already owned in the portfolio.

Over this period, the strategy produced an annualized total return of 12.1 per cent while the S&P 500 Total Return Index returned 9.7 per cent across the same period. It’s also worthwhile noting that when markets were down (defined as the S&P 500 producing negative returns across a given quarter), the strategy outperformed the benchmark 75 per cent of the time. Stocks that qualify for purchase into the strategy today are listed in the accompanying table.

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

Select U.S. dividend stocks

RankCompanyTickerMarket Cap (US$Mil)Recent Price (US$)Div. Yield (%)Trailing 12M Price Chg (%)5Yr Beta5Yr Div. Growth Rate (%)3M EPS Estim. Revision (%)
1Broadcom Inc.AVGO-Q 101,312.8 255.944.11.50.873.62.0
2AbbVie Inc.ABBV-N 118,355.3 80.065.3-19.11.123.61.5
3AT&T Inc.T-N 235,506.5 32.276.3-0.20.52.1-0.1
4Best Buy Co.BBY-N 17,659.0 65.943.0-3.41.026.10.9
5Comerica Inc.CMA-N 11,164.3 72.423.7-23.21.541.60.3
6Macy's Inc.M-N 6,476.6 21.017.2-39.80.53.8-0.2
7Lam Research Corp.LRCX-Q 27,271.6 181.902.4-8.21.659.7-0.7
8Darden Restaurants Inc.DRI-N 14,773.1 120.132.537.40.38.22.6
9Interpublic Group of Cos.IPG-N 8,553.6 22.104.3-2.21.121.93.6
10Ford Motor Co.F-N 39,217.2 9.836.1-14.91.12.315.8
11Texas Instruments Inc.TXN-Q 98,567.9 105.062.9-6.11.225.61.6
12Gilead Sciences Inc.GILD-Q 85,054.3 66.893.8-0.81.140.74.4
13Zions Bancorporation NAZION-Q 8,277.5 45.342.6-17.31.575.91.1
14Foot Locker Inc.FL-N 4,986.6 44.403.4-17.70.812.04.6
15T. Rowe Price Group Inc.TROW-Q 24,534.3 103.752.9-14.61.111.316.0

Source: Morningstar CPMS

Emily Halverson-Duncan, CFA, is a director, CPMS sales at Morningstar Research Inc.