NEW YORK (TheStreet) -- Last week, I reviewed the performance of a stock screen designed to identify small-cap companies, with a strong record of dividend growth, that appeared to have the ability to continue increasing dividends in the future. As promised, I've developed a current list of qualifiers that I'll be tracking over the next year.
When you screen for stocks with certain attributes, the hope is that the group will outperform, and that you've stumbled onto a set of solid criteria that will work consistently. It certainly does not always pan out that way. It's a matter of trial and error, and sometimes a year or even two or more is not an adequate timeframe in order to determine success or failure. A year is an eternity to some investors, and in this fast-paced investment world, some would be inclined to pull the plug if something was not working quickly.
The theory behind this screen, in summary, is that owning smaller companies with the ability to grow their dividends over time will be rewarding to shareholders, and not necessarily because of the cash that is paid out. I believe that rising dividends indicate a company's health, confident management, and in some case, may be a better indicator of success than earnings alone.
Earnings releases often contain several different iterations of the earnings number; GAAP, Non-GAAP, including charges and one-time events, excluding charges, etc. But there's just one dividend, and it can't be manipulated.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 below 50%.
Dividend payout ratios below 50% for the trailing 12 months, and last two fiscal years.
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