The low, low interest rates of the past several years have placed a premium and emphasis on dividend paying stocks. While this is sound thinking, it’s incomplete.

For all but the most unique circumstances, investors want to focus on dividend paying stocks with a track record of consistently increasing their dividend.

Principally there are two reasons for this. First, for investors relying on dividends for income, consistent increases are a hedge against inflation. Second, increases in dividends increase your cash on cash returns. For instance if you have a $10,000 position in a company paying $300 annually, and over the course of time this increases to $600, your dividend yield on the original $10,000 of cash invested is now 6%.

The chart below shows the dividend champions I’ve identified based on their track record of increasing the amount of cash they return to shareholders.

The stocks in the yellow-shaded area doubled their dividend payment to shareholders over a 10-year period. Near the top of the list is Exxon Mobile (NYSE:XOM) The stocks in the blue-shaded area doubled their dividend payment to shareholders in a remarkable five-year period. Microsoft (NASDAQ:MSFT) is one of the names at the top of that list. Remember, doubling your income is no easy trick. For instance, data from the Social Security Administration’s national average wage index shows that over the last 10 years, wages have grown at a compound annual growth rate of 2.70%. At this rate it will take wages about 26 years to double. And if you’re a high earner, above the controversial $250,000 line, you’ve got to figure inevitable bouts of unemployment into your calculations.

I’ve added in the dividend payout ratio because it’s an important variable in assessing whether or not a company can continue to increase dividend payments to shareholders. The payout ratio is defined as Dividend Per Share ÷ Earnings Per Share. The higher the ratio, the less room a company has to keep the dividend constant or increasing in lean years, simply by increasing the percent of net income that is allocated to shareholders.

The payout ratio is not a silver bullet for assessing dividend-paying ability. For instance, companies with high amounts of depreciation will present a distorted picture, as cash flow per share is likely to be higher than earnings per share.

It may be altogether anti-climactic to mention it, but one stock that should be on the above list, but is frequently MIA, is Altria Group (NYSE:MO). One reason for this is the 2008 spin-off of Philip Morris International throws an absolute value or compound annual growth rate dividend analysis out of kilter.

However a slightly closer look reveals what a dividend star old MO really is. Specifically, when the spin-off of Philip Morris International (NYSE:PM) was completed in March of 2008, MO shareholders received one share each of PM for every share owned. (For you history buffs, on March 30, 2007, Altria spun out Kraft Foods (NASDAQ:KRFT) as well.) In 2002, MO was paying a dividend of $2.44 annually. Today the MO and PM combined are paying $5.16, for a picture-perfect double.

Sources:

Wage Growth

Philip Morris International Spinoff

Kraft Spinoff from Philip Morris