There are major companies that have cowered or even crumbled amid the pandemic crisis, filing for bankruptcy protection and/or even shutting down. And there are those that have merely flinched—suspending or scaling back their dividends. But there also are a select few that have moved boldly forward, raising their dividends as a sign of continued strength.

These confident corporate giants represent the type of stock that money manager David L. Bahnsen, CFP, ­zeroes in on. He says filling your portfolio with companies that are secure enough about their cash flow and long-term prospects that they can boost payouts is the ideal strategy for the rocky environment that investors face over the next several years. These stocks offer investors reliable income and the potential to match or beat broad market returns. Over the past decade, companies in the S&P 500 that have raised dividends for at least 25 consecutive years averaged 13.3% annualized returns versus 13.2% for the S&P 500 overall—with about 10% less volatility. 

Bottom Line Personal asked Bahnsen why a dividend-growth strategy works in today’s investment environment and which stocks are most attractive now…

Prospects for Growth, Not Just Consistency

Most investors understand the wisdom of owning stocks that pay a consistent dividend. Getting reliable cash payments from an investment is especially important for investors who are in or near retirement. And ­maximizing those payments is critical at a time when 10-year US Treasury bonds ­recently yielded a mere 0.71%. However, a consistent dividend may not provide much insight into a company’s growth potential. In contrast, changes in dividend levels tell us plenty. In the first five months of 2020, about 14% of companies in the S&P 500 that usually pay dividends suddenly suspended or lowered them, reflecting concerns over available cash and doubts about earnings growth. Companies that don’t just pay a dividend but reliably boost it even through assorted crises, including recessions, provide powerful evidence of rising cash flows and underlying strength in earnings-growth prospects. 

Finding the Best Dividend Growers

My list of attractive stocks excludes some recent dividend growers, ranging from Costco to financial-services company Ameriprise, that don’t meet all my criteria. Look for companies that raised their dividends in the first half of 2020 and meet the following criteria…

Dividend increase for a minimum of at least five consecutive years. Many of the holdings in my portfolio have raised their annual dividends ­uninterrupted for decades.

Substantial dividend growth rate well above the rate of inflation. I like businesses that increased dividends by an average of at least 5% annually over the five past years. 

Higher dividend yield than the S&P 500 index’s average yield, ­which recently was 2%. 

Reasonable payout ratio. This is the percentage of a company’s profits that is distributed as dividends. In many industries, a company with a long-term payout ratio ranging from 35% to 50% has the best chance to keep raising its dividends. 

Undervalued stock price. Stocks should trade at low price-to-earnings ratios and other valuation measures relative to their historical valuations.

Important: If a company maintains but doesn’t increase its dividend in any given year, I reevaluate the stock. It could be a sign that earnings growth is faltering or cash flow is weakening. I will sell the stock if the company looks like it may have to cut its dividend.

6 Attractive Dividend Growers

All of the following companies meet the above criteria. Like many stocks, they have experienced volatility this year, but their long-term business prospects are not significantly impaired and their share prices have the potential to surge when the economy recovers. 

Cisco Systems (CSCO) is the legendary Silicon Valley equipment maker that created the infrastructure of the burgeoning Internet two decades ago. It has evolved into a business that benefits directly from the stay-at-home work trend. Cisco’s cybersecurity software tools allow companies to safeguard their employees when they use computers at home or other remote sites. The company also makes networking switches, routers and other gear critical to the global rollout of 5G wireless networks that is expected to accelerate in 2021 and 2022. Recent yield: 3.18%. Recent share price: $45.35.

Eaton Corp. (ETN) isn’t a well-known industrial giant, but the 109-year-old company manufactures electrical parts and power systems for many parts of the economy, ranging from utilities and trucking to factories, data centers and aerospace. Fears of a recession-related slowdown have hurt the stock price, but Eaton should continue to do well because so many of its products serve mission-critical functions such as fuel pumps for airplanes and uninterruptible power supplies in hospitals. Eaton has positioned itself to become a key supplier to electric-vehicle makers in the next few years. Recent yield: 3.37%. Recent share price: $86.69.

Enterprise Products Partners (EPD) transports natural gas and crude oil through more than 50,000 miles of pipeline. As of early June, the stock had fallen 27.5% this year as investors fled the energy sector. But the business is relatively insulated from the collapse in oil prices because it signs long-term contracts with major energy providers and has more than $5.3 billion of new projects lined up, including natural gas export tanks and terminals on the Gulf of Mexico. The company is structured as a master limited partnership (MLP), which avoids corporate taxes by distributing almost all of its income to shareholders in the form of dividend distributions. Though its five-year dividend growth rate is below 5%, it’s 10-year growth rate is above 5% and it has raised its dividend every year since it went public in 1998. Recent yield: 9.11%. ­Recent share price: $19.54.

International Business Machines (IBM) has struggled in recent years because of its fading legacy business running giant mainframe computers at companies. But it has reinvented itself, pivoting toward more profitable areas of technology including artificial intelligence software and cloud computing. Recent yield: 5.36%. Recent share price: $121.65.

Johnson & Johnson (JNJ) is known for its over-the-counter consumer health-care products such as Tylenol and Band-Aids. But the lion’s share of its profits come from pharmaceuticals. This year, the company has invested more than $1 billion to develop a COVID-19 ­vaccine and expects to launch human clinical studies by September. The stock is attractive even though J&J has faced various product and marketing lawsuits in recent years and recently announced plans to discontinue North American sales of its talc-based powder, which ­faces claims over potential links to cancer. ­Recent yield: 2.86%. Recent share price: $141.25.

3M (MMM), which makes tens of thousands of products from Scotch Tape to corrosion protectants for cars, has partnered with the US Department of Defense to produce two billion N95 respirator face masks by the end of 2020. Although near-term earnings have been crimped by slowdowns in the ­automotive and consumer-electronics markets, the company has about $4.5 billion in cash. Recent yield: 3.73%. ­Recent share price: $157.73.