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TheStreet Open House

18 Dividend Stocks That Will Outlive the Hype

NEW YORK ( TheStreet) -- With dividend investing suddenly in vogue, my inner contrarian shudders with every pro-dividend TV segment and newspaper headline.

"Leave my beloved dividend stocks alone!" -- I think and drift into memories of the good old days when the media celebrated cash-flow negative "growth" stocks and sneered at corporate bellwethers as "stodgy" and "grandfatherly."

But then my better judgment appeals to me: It's for the best.

Seth Klarman -- the famous and elusive value investor -- once asked himself an interesting question in the foreword of his hard-to-find book Margin of Safety:

" In writing this book , Don't I run the risk of encouraging increased competition, thereby reducing my own investment returns?" He then rationalizes, "I am pained by the disastrous investment results experienced by great numbers of unsophisticated or undisciplined investors."

I too am pained by the attitude that dividends are a harbinger of corporate doom, a sentiment that -- despite the growing popularity of dividends -- has left many investors conflicted.

First off, history is firmly on the side of dividend-paying stocks: collectively, they outperform. Second, why should the owner of a company only enjoy the fruits of corporate success by relinquishing ownership? This is perverse! If you love the company you own, you should profit more by owning more.

Lastly, dividends can save the world. It may sound ridiculous, but Benjamin Graham once posited that if all corporations maintained a generous dividend policy, then the likelihood of a banking crisis would slowly fade away.

When America's most credit-worthy corporations keep war chests to self-finance their own expansion, then bankers are left with fewer prudent investments (and too much time to get into mischief).

So, having said all of this, here is a turnkey portfolio of dividend growth stocks that should provide a reasonable amount of growth and stability. More than 100 corporations with a history of raising dividends (for a decade or more) were analyzed. Any company with an abnormally low tax rate was discarded. The final list reflects the companies that have a liability-adjusted cash flow yield* 1.5 times greater than the 10-year Treasury note and a return on invested capital (using 5-year average data) greater than the average of all the companies analyzed (22.69%).

The number of stocks on this list that are at or near 52-week highs is somewhat distressing, but no more distressing than the valuation of the stock market as a whole. Remember, this list is constructed using only quantitative criteria (in other words, strictly by the numbers). 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."

*5-Year Avg. Free Cash Flow / ((Outstanding Shares x Per Share Price) + (Liabilities - Cash))

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