When chasing yield, there may be a more prudent strategy to choosing stocks than simply seeking the highest dividends. That's according to Eric Ervin, CEO of Reality Shares, a dividend-focused ETF firm.
"The biggest concern is when you start to reach for yield. And there's too many companies that have kind of ... let's think of them as the fallen angels ... who have paid these dividends over time but they can't actually maintain that kind of a dividend payment," Ervin said.
He says, instead, look to the companies that are most likely to increase their payout in the long run and are healthy enough to keep those raises coming.
Reality Shares' DIVCON system rates companies based on their dividend health and the likelihood that they will raise or lower their dividend in the next year. Companies' ratings are created based on a weighted average of seven factors that are correlated to future dividend decisions, including cash flow, buybacks, historic dividend trends, and external financial ratings.
Out of a five-tier rating system, Divcon 5 companies are most likely to raise their dividend and Divcon 1 stocks are most likely to either lower or get rid of their dividend.
These are the five companies with the highest DIVCON scores. They have the highest probability of a dividend increase:
Nike has been one of the top performing dividend stocks according to the DIVCON tool for 8 of the past 14 years. Ervin said he expects Nike will increase their dividend for a 15th consecutive time. Most recently, Nike announced a 14 percent dividend hike on November 19 to $0.32 per share. The athletic shoemaker initiated dividend pay in 1984--since then the dividend has grown 64 times.
Here are the five current companies with the lowest DIVCON scores, meaning they are the least safe dividend stocks:
- Marathon Oil (MRO)
- Boardwalk Pipeline (BWP)
- Newmont Mining (NEM)
- Prospect Capital (PSEC)
- Wynn Resorts (WYNN)
What's ahead for dividends in 2016?
"Dividends are likely to fall a little short of a record fifth straight year of double-digit growth, but we expect them to continue outperforming their long-term six to eight percent average growth," Ervin said.
A staggering $107.9 billion in dividends were issued by American companies in the third-quarter, setting a new record, according to data by Henderson Global Investors. Globally, dividends reached $297 billion.