NEW YORK ( TheStreet) -- In September 2010, we set out to provide you, the investor, with a list of 10 dividend stocks most likely to outperform.
Happily, we did not disappoint.
Our 10 selections -- limited to the universe of Dividend Aristocrats (an index of companies that raised dividends for 25 years or more) -- managed to handily outperform the
S&P Dividend Aristocrats ETF
Even more happily, our decemvirate outperformed the
Dow Jones Industrial Average
and the ever-formidable
Vanguard Total Stock Market Index
But a dose of humility is in order. Had it not been for the stunning outperformance of
, the remaining portfolio would have been entirely pedestrian. In this case, luck trumped foresight.
But there is an important lesson to be had: For the patient investor, time and inactivity can be powerful allies.
If a covered-call strategy been used to generate income against this portfolio, it's very likely that VF Corp. would have been called away, leaving the investor with a few quick bucks at the expense of an extraordinary (long-term) capital gain.
Sixteen months later, the patient investor could have chosen to divest from VF Corp. at a handsome profit and favorable tax treatment, reinvesting the profits into a more attractively valued stock (should such a stock exist).
To that end, the
following 10 stocks are among the most attractively valued Dividend Aristocrats for 2012
, also meeting the criteria that we established in 2010:
- Each stock must have a liability-adjusted cash flow yield* (using five-year average cash flow) greater than the yield of a 10-year U.S. Treasury note.
- Each stock must have a return on invested capital greater than 10% (using five-year historical data).
- Each stock must have appreciated in value over the past decade.
- Each company must have a five-year average tax rate greater than 25%.
- Each company must have a "quick ratio" greater than 1.
As always, model portfolios should not be treated as gospel; rather, use them as a starting point for your own research. Similarly, all investors should apply their own valuation and qualitative criteria to determine what constitutes a "good buy."
Lastly, if this author could
predict stock market winners, he would probably not be writing articles -- so please set your expectations accordingly.
*5-Year Avg. Free Cash Flow / ((Outstanding Shares x Per Share Price) + (Liabilities - Cash))
Because financial and insurance companies cannot be valued with a simple cash flow formula, those companies have been omitted from our consideration.