A case for dividend growth companies

Thanks to Federal Reserve’s latest attempt dubbed as QE3 (Quantitative Easing three), the low dividend paying companies may increase their dividend payments. According to Barron’s the Dow Jones U.S. Select Dividend Index ETF (Exchange Traded Fund) which has a 4.1 percent yield only paid out 30 percent over the past two years.

Companies are sitting on lots of cash. Those who are seeking current income traditionally go after high yield and high payout ratio companies. However, Barron’s argues that investors should look for those companies that are willing to increase the dividend over time and has a low payout ratio.

Exelon has a 5.7 percent yield with a payout ratio of 87 percent. Its dividend yield has grown approximately 5 percent annually. Therefore, Barron’s argue that it has a low potential to increase its dividend. It argues for companies that has a proven track record for increasing dividend over time and a current low pay out rate. Those companies that meet its criteria include UnitedHealth Group, Aetna, Ralph Lauren, Altera and AmerisourceBergen based on a calculated Dividend Integrity Index. The bottom line is to look for companies that have the potential to increase dividend payment over time not those who are already paying higher yields.