NEW YORK ( TheStreet) -- I've long been a proponent of stock screening in order to not only generate specific ideas, but also to try and identify groups of stocks with particular attributes that may demonstrate the ability to outperform the market. These are not always successful over time, but it is still worth the effort because there is much to be learned.
The past few years, I've run a stock screen early each January designed to identify smaller companies that have a strong record of dividend growth, and also appear to have the wherewithal to continue raising their dividends in the future. The level of yield here is not of great concern to me, as this is not meant to be an income generation strategy.
The focus on growing dividends is due to the fact that I've long been a believer that dividends represent more than just cash that is returned to shareholders. 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. Furthermore, you can't fake dividends. Companies can manipulate earnings, but with dividends, what you see is what you get. There is also a built-in system of checks and balances; 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.
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