"TOP 40 DIVIDEND STOCKS FOR 2010" Update

As I reported a few weeks ago, 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 and five months sooner than 2008's.

I have completed my first pass through all 700 original candidates. To refresh your memory, in the first pass I apply five requirements to each candidate. The five requirements are:

(1) Yield must be > 3.0%. For stocks that have increased their dividend for at least 20 years in a row, the minimum yield is 2.5%. For REITs, the minimum yield is 5.0%, to make up for the increased taxability of distributions by REITs compared to ordinary dividends.

(2) The 3-year total percentage increase in the dividend must be at least 16% (or about 5% annualized). For stocks that have raised their dividends for 20 or more years in a row, the three-year increase must be at least 12% (or about 4% annualized).

(3) The stock must have delivered a positive return in 3 of the past 5 years, including year-to-date in 2009.

(4) The total return for the stock over the past 5 years must be >0%. (For comparison, the S&P 500's return over the same time period has been about 2.6%.)

(5) The stock must have raised its dividend in each of the past 5 years.

During the first pass, I "eased" some of the foregoing requirements. The reason is that I was working with partial 2009 numbers, so I wanted to give stocks every fair opportunity to pass through to the next stage of testing. So, for example, I eased the 3.0% dividend requirement to 2.8% for the first pass. By the end of the year, a stock with a 2.8% yield might have a 3% yield.

Here are the results:

--95 stocks passed the first set of tests without missing any, although as just stated, some of the requirements were "eased" from what they will eventually be. I put these 95 stocks into what I call Group A.

--74 stocks did not pass all of the screens, but they fell just short in a single category. Again, mindful of the fact that I am doing this work prior to the end of 2009, I placed these 74 stocks into Group B...they will get another chance.

So a total of 169 stocks passed their way into the next stage of testing. Another way of looking at this is that more than 500 stocks have been eliminated from further consideration. I love to eliminate stocks. I think it goes back to my horse-race betting days. In handicapping a race, I always tried to eliminate every horse that appeared to have no chance to win the race. (Believe me, in the average horse race, some horses can barely trot, let alone compete.) Once I'd done that, I felt like I was gazing on the 3 or 4 legitimate contenders to win the race. It cut out a lot of further work.

Dividend stocks are the same way. I have now eliminated the halt, the lame, and the other stocks that have no chance of being selected as one of the Top 40. I don't have to do any more analysis on the eliminated stocks. I can focus on the real contenders.

On Monday, I will start to put Group A and Group B through the same 5 tests. This time there will be no "easing." The tests will be applied rigidly to select the stocks that will be allowed to pass to stage-3 testing. That said, I will make selective exceptions for a few stocks, based on unusual factors specific to individual companies. There will be just a few of these. Based on past experience, when I am done with stage-2 testing, about 75 stocks will have survived. To them, I will apply the full Easy-Rate scoring system, let them sort themselves out, and thus whittle the list down to the Top 40.

Sidebar: Of 2009's Top 40 Dividend Stocks, 29 passed through to Group A, and another 7 made it into Group B. That's good news: It means that 36 of 2009's Top 40 stocks "did good" in a year when, as you have probably read, dividend stocks in general got scalped, with many cutting their dividends, skipping a payment, or even eliminating dividends altogether. Of the remaining 4, two did not pass because their dividend yields have become too low. That's also good, because it means their prices went up enough to push their yields down...yields and prices move inversely to each other.