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Finding Dividend Leaders

Use this screen to suss out dividend stalwarts.

Haywood Kelly, 05/11/2010

With governments--national and local--facing huge financial obligations and runaway deficits, inflation has to be on every investor's radar screen. Governments throughout history have turned to money creation to bail themselves out of dire financial straits, and just as night follows day, money creation leads to inflation. Particularly for the investor needing income, inflation spells trouble. Bonds are rotten investments in an inflationary environment, as are high-yield common stocks if they belong to companies that lack the ability to raise prices.

But there are common stocks out there that offer a nice balance of high current yield and the ability to raise dividends over time to offset inflation. They're the focus of this issue's stock screen.

Dividend Yield > 4%

How high a yield should we look for? The U.S. market is only yielding about 2% these days, so we want to focus on stocks yielding significantly above that. But not too much higher, or else we risk ending up with a miserable set of companies that may have high current dividends, but which don't have the financial wherewithal to maintain them.

And Morningstar Rating >= 3 Stars

A dividend yield of 4% or more offers us a universe of 700-plus stocks to choose from. Our first step in narrowing this list is to throw out those our analysts think are overvalued. Even if we earn a decent income stream on an investment, we don't want to see our capital shrink because we paid too much.

The dividend yield only measures current dividends as a percent of the stock price. For prudent investors, it's important for the income stream at least to stay constant in future years, and better yet to grow. Only companies with the ability to increase dividends can help investors offset the declining purchasing power of the dollar in an inflationary environment. To make sure we focus on companies with the ability to do this, we introduce two quality screens.

And Economic Moat >= Narrow

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