Stock Selection

The construction of portfolios that generate significant levels of current dividend income and high expectations for future dividend growth and price appreciation follows a disciplined process:

• Step #1 - All publicly-traded domestic stocks with market capitalizations in excess of $100 million are screened for a minimum 10-year history of annual, uninterrupted dividend growth. A similar screen is performed for international stocks traded on U.S. exchanges (ADR's and ADS's) with 5-year histories of uninterrupted dividend growth.
• Step #2 - The resulting 340+ "dividend-growth" stocks are subjected to analyses that measure the quality and consistency of historical free cash flows, balance sheets, operating statements, and business segments. The company's current and prospective business prospects (and growth) are also analyzed. As warranted, conversations are held with company managements and "street" analysts.
• Step #3 - This analysis narrows the universe to 75+ stocks which are then subjected to a ranking system that has three key elements: current dividend yield; prospective dividend growth rate; and a proprietary measure of "free cash flow yield." The "free cash flow yield" is a complex measurement that can be summarized as the company's free cash flow divided by its market value. High free cash flow yield signifies a lower price; high free cash flow yield in excess of dividend yield means that the dividend is well "covered".
• Step #4 - The resulting 40 to 50 favored stocks are combined in very structured portfolios; each intended to optimize the portfolio's current yield, anticipated dividend growth, and anticipated free cash flow (and earnings) growth. The ultimate portfolio selections are also made with emphasis placed on portfolio diversification, balance, and risk management.