As part of my monitoring process I review the list of dividend increases every week. Every month, I also review and update the list of dividend champions.

This process helps me follow the developments in companies I own. It also helps me identify companies for further research. I use the following logic to narrow the list down and evaluate companies:

I try to focus my attention on companies that have raised dividends for at least a decade. This helps me to focus on companies that have managed to grow dividends through an average economic cycle of boom and bust.

I also review the recent dividend increase, relative to the dividend growth over the past decade. This is a helpful indicator to determine whether dividend growth is decelerating or accelerating. I do not want companies that reward shareholders with token increases when their payout ratios are high and earnings growth is non-existent.

Speaking of earnings growth, I want a company that is growing earnings per share, and has achieved a positive EPS growth over the past decade. Rising earnings per share are the fuel behind future dividend increases. When you look at trends in EPS, however, you may need to dig deep behind some large year-over-year fluctuations in order to account for one-time events. I also look at forward earnings per share, in an effort to quickly scan a large list of dividend stocks, since forward estimates tend to take out one-time items. However, earnings estimates are usually a little over-optimistic, which is why they have to be taken into consideration along with prior year earnings, as well as earnings per share over the past decade. Others also like to look at revenues too. Isn’t investing analysis fun?

I also focus on dividend safety. A dividend payout ratio above 60% is usually a warning sign. Another warning sign includes a rising payout ratio – in general, we want a stable trend in the payout ratio over the past decade. All rules have exceptions to them, however – companies in the utilities and tobacco industries, for example, have high payout ratios. The safest dividend is one with a payout ratio below 60%, where earnings per share are growing, and the dividend grows at the pace of earnings growth. 

Last but not least, we also want to evaluate the company for valuation. I take into consideration the information for each company I gathered above, and rank those companies against my entry criteria. Most notably, I look for companies selling below 20 times forward earnings.

Now that you know how I evaluate companies, I am including three dividend champions that raised dividends to shareholders over the past week. The companies include:

Black Hills Corporation (BKH) operates as a vertically-integrated utility company in the United States. It operates in three segments – Electric Utilities, Gas Utilities, Power Generation, and Mining. The company raised its quarterly dividend by 6.30% to 50.50 cents/share. This was the 48th consecutive annual dividend increase for this dividend champion. The recent raise was larger than the 2.80%/year average annual raise over the past decade. Between 2008 and 2017, the company raised its earnings from $2.75/share to $3.21/share. The company is expected to earn $3.42/share in 2018. The stock seems fairly valued at 17.40 times forward earnings and yields 3.40%. Given the slow rate of earnings and dividend growth, however, I view it as a hold at best today.

Mercury General Corporation (MCY) engages in writing personal automobile insurance in the United States. The company raised its quarterly dividend by 0.40% to 62.75 cents/share. This marked the 32nd consecutive annual dividend increase for this dividend champion. It was slower than the ten year average of 1.80%/year. Between 2007 and 2017, the company’s earnings fell from $4.34/share to $2.62/share. The company is expected to earn $2.44/share in 2018. Mercury General seems overvalued at 24.60 times forward earnings. The stock yields 5%, but the dividend doesn’t seem well covered based on forward earnings. I would give the company a pass at this time.

Cintas Corporation (CTAS) provides corporate identity uniforms and related business services primarily in North America, Latin America, Europe, and Asia. It operates through Uniform Rental and Facility Services and First Aid and Safety Services segments. The company raised its annual dividend by 26.50% to $2.05. This is the 35th consecutive year that the annual dividend has increased, which is every year since Cintas went public in 1983. The dividend raise was larger than the ten year average of 15.30%/year. Between 2008 and 2017, the company raised its earnings from $2.15/share to $7.56/share. The company is expected to earn $7.24/share in 2018. I like the company, but unfortunately, it is overvalued at 24.80 times forward earnings. The stock yields 1.10%. I would be interested in Cintas on dips below $145/share.