6 Wildly Profitable Dividend Champions

04/30/2014 9:00 am EST

Focus: STOCKS

Dividend champions are often great defensive investments, says James Dennin on Kapitall.com, and these six stocks have industry-beating profits to boot.

Last week we wrote about how dividends might not necessarily be all they're cracked up to be since they're taxed much higher than capital gains. But they're also still pretty awesome, and income investing shouldn't be seen as the strict domain of retirees looking to supplement their Social Security checks.

The whole point of dividends is for low-growth companies to provide shareholders with an adequate return. But as the company's stock price goes up and inflation occurs, dividends need to grow along with them.

Otherwise, what would be the point?

That's why income investors stress the importance of looking at dividend increases rather than the size of the dividends themselves. A company can institute a superhigh dividend if it wants, but that will severely limit its ability to make dividend increases in the future.

The most cited example of dividend growth is probably Johnson & Johnson (JNJ). Between 1961 and 2004, the company increased its dividend every year by an average of about 12%. If you bought shares in 1961, you could have seen a 225% return in only 20 years, mostly because of the compounding work of those dividends.

To find stocks with a good record of increasing dividends, we always start with the DRiP list of dividend champions. These stocks have all increased their dividends each year for the last 25 years.

We then further screened the list of dividend champions for stocks that still have industry-beating profits, meaning they sustain greater profit margins than their competitors. This will give them the resources to support more dividend increases in the future (assuming the profit growth is sustainable).

Will these dividend champions continue their impressive streaks? Use the list below to begin your analysis.

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1. 3M Co. (MMM): Operates as a diversified technology company worldwide. Market cap at $89.89 billion, most recent closing price at $136.65; raised its dividend 56 consecutive years. It now stands at a yield of 2.12%. TTM gross margin is at 52.27% versus the industry average at 43.1%. TTM operating margin is at 21.59% versus the industry average at 12.97%. TTM pretax margin is at 21.26% versus the industry average at 12.08%.

2. AT&T, Inc. (T): Provides telecommunication services to consumers, businesses, and other service providers worldwide. Market cap at $179.64 billion, most recent closing price at $34.50; raised its dividend 30 consecutive years. It now stands at a yield of 5.25%. TTM gross margin is at 60.03% versus the industry average at 50.75%. TTM operating margin is at 24.06% versus the industry average at 18.7%. TTM pretax margin is at 21.57% versus the industry average at 14.38%.

3. Emerson Electric Co. (EMR): Operates as a diversified manufacturing and technology company. Market cap at $48.86 billion, most recent closing price at $69.50; raised its dividend 57 consecutive years. It now stands at a yield of 2.57%. TTM gross margin is at 42.9% versus the industry average at 36.47%. TTM operating margin is at 16.53% versus the industry average at 10.1%. TTM pretax margin is at 12.81% versus the industry average at 7.02%.

4. Energen Corp. (EGN): Engages in the acquisition, exploration, development, and production of oil, natural gas, and natural gas liquids in the continental United States. Market cap at $5.91 billion, most recent closing price at $81.31; raised its dividend 32 consecutive years. It now stands at a yield of 0.72%. TTM gross margin is at 49.21% versus the industry average at 32.24%. TTM operating margin is at 20.2% versus the industry average at 13.64%. TTM pretax margin is at 17.16% versus the industry average at 12.14%.

5. Nordson Corporation (NDSN): Nordson Corporation manufactures equipment used for precision dispensing, testing and inspection, and surface preparation and curing. Market cap at $4.8 billion, most recent closing price at $74.54; raised its dividend 50 consecutive years. It now stands at a yield of 1.02%. TTM gross margin is at 59.13% versus the industry average at 33.44%. TTM operating margin is at 20.36% versus the industry average at 12.42%. TTM pretax margin is at 19.61% versus the industry average at 10.7%.

6. Sigma-Aldrich Corporation (SIAL): Develops, manufactures, purchases, and distributes a range of chemicals, biochemicals, and equipment worldwide. Market cap at $11.26 billion, most recent closing price at $94.76; raised its dividend 38 consecutive years. It now stands at a yield of 0.99%. TTM gross margin is at 55.44% versus the industry average at 34.82%. TTM operating margin is at 25.26% versus the industry average at 13.42%. TTM pretax margin is at 24.3% versus the industry average at 12.38%.

Monthly returns sourced from Zacks Investment Research. Profitability data sourced from Fidelity. All other data sourced from Finviz.)

By James Dennin of Kapitall.com

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