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TheStreet Open House

10 Best 'Dividend Aristocrats' for 2012

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 (SDY).

Even more happily, our decemvirate outperformed the Dow Jones Industrial Average (DIA), the S&P 500 (SPY) and the ever-formidable Vanguard Total Stock Market Index (VTSMX).

But a dose of humility is in order. Had it not been for the stunning outperformance of VF Corp. (VFC), 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:

  1. 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.
  2. Each stock must have a return on invested capital greater than 10% (using five-year historical data).
  3. Each stock must have appreciated in value over the past decade.
  4. Each company must have a five-year average tax rate greater than 25%.
  5. 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 always 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.

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