Small Dividend Growers for 2013

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.

Last year, 28 companies made the list; this year there are 27. There are several names that were on the list last year, that make the cut again, including Owens & Minor ( OMI), Sensient Technologies ( SXT), UMB Financial ( UMBF), Columbia Sportswear ( COLM), StanCorp Financial ( SFG), Men's Wearhouse ( MW), J&J Snack Foods ( JJSF), WestAmerica Bancorp ( WABC), Bank of the Ozarks ( OZRK), Stepan Company ( SCL), Lindsay ( LNN), Monro Muffler ( MNRO), Raven Industries ( RAVN), National HealthCare ( NHC) and BancFirst ( BANF).

One addition this year is Lancaster Colony ( LANC), perhaps best known for its food products that include the T. Marzetti line of salad dressings. The company has been on the list in previous years, but did not make it last year, only because its market cap was in excess of $2 billion. Lancaster Colony has an incredible dividend history, somewhat quietly increasing the dividend for 50 consecutive years.

LANC Chart LANC data by YCharts

Other additions for 2013 include Carbo Ceramics ( CRR), DeVry ( DV), RLI ( RLI), International Speedway ( ISCA), Knight Transportation ( KMX), Tennant ( TNC), American Equity Investment Life ( AEL), Badger Meter ( BMI), Epoch Holding ( EPHC), Gorman Rupp ( GRC) and National Interstate ( NATL).

Some of last year's qualifiers are not included this year, simply because their market caps increased beyond the $2 billion mark. These include last year's top performer A.O. Smith ( AOS), as well as ITT ( ITT).

There may be value in doing a similar search that focuses on companies with market caps greater than $2 billion.

At the time of publication the author held no positions in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

At the time of publication, Heller held no positions in stocks mentioned.

Jonathan Heller, CFA, is president of KEJ Financial Advisors, his fee-only financial planning company. Jon spent 17 years at Bloomberg Financial Markets in various roles, from 1989 until 2005. He ran Bloomberg's Equity Fundamental Research Department from 1994 until 1998, when he assumed responsibility for Bloomberg's Equity Data Research Department. In 2001, he joined Bloomberg's Publishing group as senior markets editor and writer for Bloomberg Personal Finance Magazine, and an associate editor and contributor for Bloomberg Markets Magazine. In 2005, he joined SEI Investments as director of investment communications within SEI's Investment Management Unit.

Jon is also the founder of the Cheap Stocks Web site, a site dedicated to deep-value investing. He has an undergraduate degree from Grove City College and an MBA from Rider University, where he has also served on the adjunct faculty; he is also a CFA charter holder.

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