Starting on "TOP 40 DIVIDEND STOCKS FOR 2010"

In the past two weeks, I have begun work on THE TOP 40 DIVIDEND STOCKS FOR 2010, my annual e-book for investors working on a dividend strategy. My hope this year is to release it in January, or three months sooner than 2009's March release and five months ahead of 2008's May release.

It seems like the earlier in the year it comes out, the more helpful it will be. The trade-off is that I will do most of the research without full-year data for 2009, but overall I think it's a good compromise to get it out sooner.

I haven't decided on the sub-title for the new edition. I want to strike the perfect balance between boring and hyperbolic. Many people think that dividend stocks are boring--unaware, I guess, that over long periods, dividend stocks have delivered the best total returns of any category of stocks by several percent. On the other hand, I don't want to insult people's intelligence with ridiculous claims like "How to Turn $5,000 into a Million with Dividend Stocks."

Here were the subtitles I used in the first two editions:
2008: How (And Why) to Build a Cash Machine of Dividend Stocks
2009: Dividend Investing for the Long Haul

If you have an idea for a great sub-title, drop me a line. If I use your suggestion, I'll send you a free copy of the e-book when it comes out.

That's not my main reason for writing this post. I want to tell you about something I've noticed as I apply an initial series of qualifying tests to the nearly 700 candidates for the Top 40. Three of the first-level tests are:
--Stock must have shown positive total returns in 3 of the last 5 years.
--Stock must have delivered total returns greater than 0% over the past 5 years.
--Stock must have raised its dividend in each of the past 5 years.

I'm about halfway through the list now. What I've noticed is the strong correlation among these three tests in many stocks that are failing the first round of hurdles. Usually, a stock that fails one of them fails all three. I guess it's no surprise that the first two are correlated. After all, a stock that has delivered negative returns in 3 out of 5 years would have difficulty delivering a total return above zero without an extraordinary year out in the other two.

But the interesting part is the correlation with the last hurdle: Must have raised its dividend for the past 5 years. That means there is a connection between the stock's total return (which includes price increases) and its dividend. If a stock did not raise its dividend in each of the past 5 years, that means it either cut it or froze it.

I'm not sure which comes first, I see this as a chicken-and-egg situation. That is, does a stock's price fall because it freezes or cuts its dividend, or does a cut or frozen dividend merely reflect lousy financial performance across the company. I have read studies that suggest it is the first, and I have written articles suggesting that a dividend cut or freeze can be an early warning sign of other bad news about to emanate from a company.

Whether there is a cause and effect, though, the lesson for the dividend investor is clear: A dividend cut or freeze is a big fat warning signal about the viability of the stock itself as an investment. That's why you won't see any stocks with recent cuts or freezes among next year's Top 40.