NEW YORK ( TheStreet) -- In general, stocks paying healthy dividends outperformed in 2011, so it stands to reason that it's too late to join the party now, right? Not so, according to Oppenheimer & Co., which says that skepticism about the continued pursuit of dividend strategies is misplaced. "Conventional wisdom would suggest that the focus on dividends has become a crowded trade given all the attention this strategy has garnered lately," wrote Brian Belski, the firm's chief investment strategist, in market commentary released earlier this month. "As it turns out, the data suggest the opposite. Income-oriented U.S. equity funds have exhibited net outflows for much of the past year and these funds have represented an increasingly smaller portion of total U.S. equity funds based on net assets over the past few years."
Belski also said the idea that dividend payers are most relevant in weak or volatile markets doesn't hold up to scrutiny. "According to our work, this is simply not the case," Belski said. "In fact, dividend strategies have consistently outperformed the overall market and have typically maintained the outperformance in 'strong' market environments." FactSet Research recently offered up some data for the past 10 years that backs up this point. "Stocks with a dividend yield in the first and second quintiles of the S&P 500 dividend paying-universe outperformed the S&P 500 by 322% and 96%
respectively on a cumulative basis," the firm said. "The remaining three quintiles underperformed the index." Deutsche Bank makes the point that dividend growth is more compelling than a gaudy yield when it comes to overall stock returns. "High dividend yield stocks with no growth are essentially bonds and have weaker returns," the firm said on Jan. 17. "Historically, there is strong correlation (71%) between growth in the dividend payout ratio and the multiple, which helps explain why dividend growers outperform -- they get a bump in P/E and higher future dividends."
Deutsche Bank sees the highest dividend upside potential for the technology, consumer discretionary, materials, financials and energy sectors, and has limited expectations for the utilities and telecom industries. Oppenheimer's Belski is on board with Deutsche Bank about looking for more than high yields when considering getting on the dividend bandwagon. Cash levels and earnings growth should also be part of the analysis, he wrote, "as we have found that trends in these factors make dividend yields more believable." To that end, the firm ran a screen to come up with a list of stocks that offer what it termed dividend opportunities. The parameters were dividend yield greater than the S&P 500, dividend increases in each of the past 10 years, incremental earnings per share growth in each of the prior two years, an S&P Capital IQ quality rating of B+ or greater, free cash flow yield greater than dividend yield (except for utilities), and a price-to-earnings multiple of less than 15X based on the fiscal 2012 consensus estimate. A total of 19 stocks made the list: 3M ( MMM). Abbott Laboratories ( ABT), AFLAC ( AFL), Becton Dickinson ( BDX), Bemis Co. ( BMS), Chevron ( CVX), Emerson Electric ( EMR), General Dynamics ( GD), Hudson City Bancorp ( HCBK), Medtronic ( MDT), NextEra Energy ( NEE), Norfolk Southern ( NSC), PPG Industries ( PPG), PPL Corp. ( PPL), SCANA Corp. ( SCG), TJX Cos. ( TJX), United Technologies ( UTX), Wal-Mart Stores ( WMT), and Walgreen Co. ( WAG). What follows is some detail and analysis on five of these names: 3M, Hudson City Bancorp, Medtronic, Wal-Mart Stores, and United Technologies.