Large-Cap Stocks With Room to Grow Dividends

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NEW YORK (RealMoney) -- Although I focus mainly on small and micro-cap companies, they certainly aren't the only game in town. In fact, when it comes to dividend growth, the majority of candidates are the larger names.

Here, yield also plays a role. In my small search for small-cap dividend growers, I ignore the level of yield because some of the companies don't have a long operating history and still may be in a growth phase. As such, they don't tend to be high yielders. With the larger names, you can find the best of both worlds in growing dividends and decent yields.

With that in mind, I utilized the following criteria in my search:

Market caps greater than $2 billion

Dividend increases in at least each of the past five years

Long-term debt-to-equity ratios below 50%

Dividend payout ratios below 50% for the trailing 12 months, and last two fiscal years

Dividend yield of at least 2%

The search produced 32 names and, not surprisingly, oil is highly represented with Exxon Mobil (XOM)(2.5% current yield), ConocoPhillips (COP)(4.1%), Occidental Petroleum (OXY) (2.4%), and Murphy Oil (MUR) (2.3%). Retail also made a nice showing with the likes of Walgreen (WAG) (2.7%), Lowe's (LOW)(2.8%), and Best Buy (BBY) (2.8%).

Aerospace and defense companies were also well represented with United Technologies (UTX) (2.8%), General Dynamics (GD) (3.3%), Northrop Grumman (NOC) (3.9%), Raytheon (RTN) (4.3%), and ITT (ITT) (2.3%).

Insurance companies that made the cut included Travelers (TRV) (3.3%), Chubb (CB) (2.6%), AFLAC (AFL) (3.2%), American Financial Group (AFG) (2.2%), and HCC Insurance Holdings (HCC) (2.3%).

Raytheon and ConocoPhillips are the only names meeting the search criteria that yield more than 4%. In terms of dividend growth, as measured by a 5-year compounded growth rate (CAGR), Texas Instruments (TXN)(2.4% yield, 34.8% CAGR), Lowe's (30.7% CAGR), BOK Financial (BOKF) (2.3%, 27% CAGR), Cardinal Health (CAH) (2.1%, 23.6% CAGR), Walgreen (22.7% CAGR), and AFLAC (21% CAGR) were the leaders. For perspective, consider that a 14.4% 5-year CAGR implies a doubling of dividends over a five-year period.

Moving forward, especially in the current highly volatile market, it will be interesting to track how the 32 names perform. Given the average yield of about 2.8%, I would expect this group to have a smoother ride than the broader markets, but we'll see.

At the time of publication, Heller had no positions in any of the securities mentioned.

Jonathan Heller, CFA, is president of KEJ Financial Advisors, his fee-only financial planning company. Jon spent 17 years at Bloomberg Financial Markets in various roles, from 1989 until 2005. He ran Bloomberg's Equity Fundamental Research Department from 1994 until 1998, when he assumed responsibility for Bloomberg's Equity Data Research Department. In 2001, he joined Bloomberg's Publishing group as senior markets editor and writer for Bloomberg Personal Finance Magazine, and an associate editor and contributor for Bloomberg Markets Magazine. In 2005, he joined SEI Investments as director of investment communications within SEI's Investment Management Unit.

Jon is also the founder of the Cheap Stocks Web site, a site dedicated to deep-value investing. He has an undergraduate degree from Grove City College and an MBA from Rider University, where he has also served on the adjunct faculty; he is also a CFA charter holder.