When it comes to dividend-paying stocks, many investors think first of utilities and telecom services. "Investors are chasing the highest yield,” says Bob Zenouzi, lead manager of the Delaware Dividend Income Fund (DDIAX), "and that's where the slowest dividend growth is.”

If you're looking to increase the income component of your clients' portfolios over the longer term, it may pay to look past the usual suspects, as Zenouzi has. His fund favors dividend growth over high current yield, and he's been positioning it for gains in shareholder payments by making investments in the consumer discretionary, financials and technology sectors. Zenouzi observes that Microsoft raised its dividend 10% last fall. He also cites Apple and Intel as dividend growth stocks.

Read more: Which Sectors Are Best for Dividend Investors?


The information technology sector of the S&P 500 Index recently yielded a mere 1.59%, but dividend growth has been considerably faster than in many other parts of the market. 

In 2004, tech stocks contributed 5.14% of the index's total dividend. By the end of 2014, tech stocks chipped in 14.93%, making them the biggest contributors to S&P 500 dividends.

In absolute dollars, "they pay more than anyone else,” says Howard Silverblatt, senior index analyst at S&P Dow Jones Indices. 

Silverblatt notes that financials are also coming up. As a percentage of the index's total dividend, financials peaked in 2006, when they made up 29.5% of the S&P 500's dividend.

In terms of yield, the sector's high point was 4.44% in 2008. After falling to a little more than 9% of the S&P 500's dividend in 2009 and 2010, financials have climbed back to the point where they represent 14.67% of the index's payment. Recently, the sector yielded 1.92%.

Zenouzi contends that the raw numbers are "a little bit deceiving” because the financials sector includes real estate investment trusts. "If you took the REITs out of there, the financials would certainly fall to the bottom” of the dividend growth list, he says.

Many banks still face regulatory constraints on dividend growth. What's more, banks had to issue more shares after the financial crisis in order to boost their capital positions.

Were banks to pay dividends on all those shares at the rate they did before the crisis, says Silverblatt, "They would increase the entire index dividend by about 15%.” Don't expect that to happen any time soon.

At the bottom of the dividend growth list are two sectors favored by the proverbial widows and orphans: telecommunications services and utilities.

In 2004, they contributed 6.63% and 6.24% of the S&P 500's dividend, respectively. Since then, their share has declined, with telecommunications services contributing 5.79% and utilities 5.47% at the end of 2014.


Advisors can also find great dividend records among stocks in other sectors. Tissue maker Kimberly-Clark recently announced its 43rd consecutive annual dividend increase. Based on the new payment, it has a yield almost 70% higher than the market's.

But how do you find the next standout without having to wait four decades? "We look for companies with the ability and willingness to pay,” says Ben Kirby, a manager of Thornburg Investment Income Builder Fund (TIBAX) in Santa Fe.

Ability to pay is measurable, and can be found in a company's balance sheet strength, growing income stream and strong free cash flow. The last metric, defined as cash from operations minus capital expenditures, is one of the first things Kirby looks at. "Free cash flow is a measure of cash earnings as opposed to accounting earnings,” he says.

Willingness to pay is a little harder to discern. Josh Peters, editor of Morningstar Dividend Investor and the Chicago-based research firm's director of equity income strategy, likes to ask, "Has this company really demonstrated the commitment that I'm going to get paid even when it's not convenient for them?”

One way to find that commitment is to look for a string of past dividend increases. Kirby says a history of three to five years of dividend boosts is a "a helpful comfort signal.” But, he adds, "History is helpful, but it is not determinative.”

A growing dividend is also a telltale sign of a quality company, says Kirby. "The growing dividend is a signal from management that they're confident in the business outlook,” he says. Peters also confesses to a "huge quality bias” in his portfolio and generally avoids companies that are highly cyclical or loaded with debt. He doesn't want to wonder, "If the recession starts today, do I own all the wrong stocks?”

A hard-and-fast rule about the number of yearly dividend increases can easily trip you up, Peters says. "You're going to miss some good opportunities.” He cites Philip Morris International (PM), the 2008 spin off from Altria Group (MO). "There was no reason to wait around to see whether or not they were going to raise their dividend,” says Peters, who says that the company "inherited the dividend DNA” of its former parent. Investors who apply a mechanical approach to dividends not only avoided PM, but also Altria, which appeared to have cut its dividend. Notes Peters: "Actually, the total payout to shareholders [from both companies] went up.”

Joseph Lisanti, a Financial Planning contributing writer in New York, is a former editor-in-chief of Standard & Poor's weekly investment advisory newsletter, The Outlook.

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