A 4% dividend yield and five year average dividend growth of at least 3% is a core screen I use for finding dividend paying companies I could live off of. Three stocks on the list that recently caught my eye were AT&T Inc. (NYSE:T), ConocoPhillips (NYSE:COP), and Intel Corporation (NASDAQ:INTC).
Why 4% and 3%?
One of the rules of thumb in financial planning is that drawing 4% from a portfolio each year provides a high likelihood that you won’t run out of money before you die. That’s great, but you can get that 4% from dividends and never have to touch your principle.
Likewise, inflation’s historical level is around 3%. So, every year, most things wind up costing 3% more. If you want to keep up with those cost increases, then you have to make sure that your dividend payments increase around the inflation rate, on average, over time.
Passing the Screen
There’s no magic in a stock screen, though. Screens can cut out mostly undesirable stocks, but they really can’t pick the desirable ones. It’s more art than science.
That’s where a little elbow grease comes in. While 4% and 3% are a good start, I review the list (which normally has over 100 names on it) for those companies that I think might be worth owning. Here are a few that caught my eye:
AT&T (T)
Acquisitions and an increasingly dominant position in the mobile market have kept AT&T Inc. (NYSE:T)’s top line on a fairly steady upward climb over the past 10 years. While earnings have been a touch volatile, the dividend yield has been a rock solid grower.
AT&T’s business has been increasingly dominated by the mobile market, in which it has an effective duopoly with Verizon Communications Inc. (NYSE:VZ). With a massive subscriber base, the company’s revenues are annuity like. Moreover, AT&T Inc. (NYSE:T) stands to see revenues per customer increase over time as more and more customers get accustomed to streaming bandwidth-intensive media through their mobile devices.
This is a recipe for more dividend increases from a solid company. Debt is kind of high, but based on the business and the recurring revenues it shouldn’t be too big an issue. The shares recently yielded around 5%.
ConocoPhillips (COP)
ConocoPhillips (NYSE:COP) is an interesting story. The company bulked up a few years ago at what, in hindsight, was the wrong time. It then started to strip down, with the culminating event the 2012 spin-off of its downstream assets as Phillips 66 (NYSE:PSX). In other words its a whole new company.
That might concern a dividend investor, but there are things to like here. For example, ConocoPhillips is the largest independent exploration and production company in the United States. As oil and natural gas have become increasingly difficult to find abroad, having a solid core at home materially reduces the company’s risk profile.
At the same time, new drilling methods for oil and natural gas have made that home market more appealing. So the company is also positioned to benefit from the increase in domestic output. This makes ConocoPhillips (NYSE:COP) a great option for dividend investors who want energy exposure, but don’t want to invest too far afield.
Although it is hard to make long-term comparisons here, a yield of nearly 4.5% and a history of dividend increases before the spin off make the company well worth additional review.
