NEW YORK ( TheStreet) -- I've long been a believer that dividends represent more than just cash that is returned to shareholders; more than just yield. We all know that there are things companies can do that can fool investors, which may or may not be the intention. They can manipulate their earnings, they can announce stock buybacks, and never follow through, but they can't manipulate their dividends.
In my view, when companies raise their dividend year in and year out, it can be a good indicator not only of financial health, but also of confident management. This is also something that cannot be faked, for very long anyway.
Companies that raise their payouts to the point of unsustainability ultimately risk having to cut their dividends, which is rarely, if ever, viewed positively by the markets. In a way, this creates a system of checks and balances.
The past couple of years I've run a stock screen early in January designed to identify smaller companies that not only have a strong record of dividend growth, but also appear to have the ability to continue raising their dividends in the future. The level of yield here is not of great concern to me, and this is certainly not an income generation strategy.The search criteria that I employ for this strategy includes the following parameters:
- Market caps between $500 million and $2 billion
- Dividend increases in at least each of the past five years
- Long term debt to equity ratios less than 50%
- Dividend payout ratios less than 50% for the trailing 12 months, and last two fiscal years