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By Robert Barker With the big reduction in tax rates on stock dividends just signed into law by President Bush, we decided to search for a selection of solid dividend payers. So we turned to Value Line Investment Survey for Windows, a database on CD-ROM covering 8,421 stocks.
To cut down that list, we asked the program to eliminate companies with less than $1 billion in market capitalization, foreign companies, and all real estate investment trusts, since most don't stand to benefit from the new law. With five-year Treasury notes now paying 2.3%, we also asked for stocks with current dividend yields of at least 2.5%, but no higher than 6%. As a rule, if a non-REIT is paying more than 6% these days, it probably stands a higher risk of cutting its payout. Next, we excluded companies whose earnings and dividends Value Line expects to fall. Finally, each company had to have posted positive cash flow even after capital spending -- in other words, free cash flow, the stuff from which dividends grow.
THE RESULT. Making it onto our short list of candidates for further research were a dozen possibilities, including some familiar names such as Alcoa, General Electric and some that are less well-known, like insurance broker Arthur J. Gallagher and Supervalu, a food distributor and retailer.
Solid Dividend Payers
COMPANY (SYMBOL) STOCK PRICE INDICATED ANNUAL DIVIDEND DIVIDEND YIELD DIVIDENDSAS % OF NET INCOME
ALCOA (AA) 24.35 $0.60 2.5% 65%
AVERY DENNISON (AVY) 54.85 1.44 2.6 53
BAXTER INT'L. (BAX) 23.90 0.58 2.4 29
ARTHUR J. GALLAGHER (AJG) 26.90 0.72 2.7 36
GENERAL ELECTRIC (GE) 28.27 0.76 2.7 47
KIMBERLY-CLARK (KMB) 51.56 1.36 2.6 35
LIMITED BRANDS (LTD) 14.58 0.40 2.7 29
MARSH & McLENNAN (MMC) 49.12 1.24 2.5 43
MERCK (MRK) 55.74 1.44 2.6 45
PPL (PPL) 40.70 1.54 3.8 49
SCHERING-PLOUGH (SGP) 19.10 0.68 3.6 50
SUPERVALU (SVU) 19.20 0.57 3.0 29
Data: Value Line Investment Survey, BusinessWeek
Barker covers personal finance in his Barker Portfolio column for BusinessWeek.