Investors Reward Good Housekeeping

Here's a shocker: Companies that do the right things by shareholders -- earn money, pay dividends and generally play nice -- are increasingly finding favor with investors.

In fact, 350 stocks in the S&P 500 yielded at least 0.01% and recorded income of at least a penny in the past fiscal year, and more than 63% have posted gains in 2004. In contrast, only 25% of the S&P stocks that offered neither a dividend nor earnings have posted gains this year.

Supporting this data, research firm GovernanceMetrics International reported this week that the stocks of companies with the most admirable corporate management practices have rather handily outperformed their more slovenly peers:

• The 15 U.S. big-cap stocks that earned GovernanceMetrics' highest rating a year ago are up 18.7% since July 28, 2003, vs. the 12% gain in the S&P 500 over the same period.

• Meanwhile, a list of the 18 U.S. stocks that earned the firm's top rating on Feb. 28 this year are up 2.5% since then, vs. the 2.5% decline in the S&P 500.

In gauging corporate governance performance, analysts at GovernanceMetrics test every company in the S&P 500, S&P 400 and Russell 1000 indices on about 500 variables relating to corporate governance. The companies are then ranked from 1 to 10, with 10 being best. The company publishes a list of highest-rated stocks twice a year, and institutional investors willing to pony up $50,000 a year receive a full analytical rundown of the results.

Only 20 U.S. stocks earned the honor in the latest review, which was published Tuesday. They're listed in the table below.

Gavin Anderson, chief executive at GovernanceMetrics, says that U.S. companies have boosted their ratings over the past two years. He credits the enactment of the Sarbanes-Oxley bill in 2002, which has led to greater attention to good behavior and transparency.

Key improvements, he cited, were that 95% of companies now report having a qualified financial expert on their audit committees, vs. 65% in 2002; 73% have hiring policies concerning employees or former employees of auditor firms, vs. 14% in 2002; 90% of companies now have board evaluation policies, vs. 35% in 2002, and only 11% of companies paid their auditors more for nonaudit fees than for audit-related fees, vs. 48% in 2002.

---

Jon D. Markman is publisher of StockTactics Advisor, an independent weekly investment research service, as well as senior strategist and portfolio manager at Pinnacle Investment Advisors. He also writes a weekly column for CNBC on MSN Money. While Markman cannot provide personalized investment advice or recommendations, he welcomes column critiques and comments at [e-mail].