Barrons has an interesting article by Teresa Rivas. She interviews Henry Sanders who is the fund manager of the Aston/River Road Dividend All Cap Value Fund. Finding a Few Good Dividend Stocks

Barrons.com: Obviously, this is a dividend-focused fund, but can you explain a little more how you narrow down potential investments?

Sanders: We have six critical criteria. In order of importance, the first is the dividend, and not just a nice dividend, but we like to see companies that have a history of raising the dividend. The second would be financial strength. The companies that are more leveraged we tend to stay away from because they are more apt to run into trouble and less apt to continue to be able to raise the dividend. Third, would be priced at a discount. We are a value shop so we place what we consider an absolute value on every stock we buy, which is akin to fair market value or something like that, a term others might use. That is based on ordinarily some kind of free cash flow multiple. We want at least a 10% to 15% discount off that figure.

The next one (criterion) would be attractive business model. We tend to like simple businesses we can understand, that have predictable, sustainable cash flow streams. Good shareholder orientation is next. Dividend policy is certainly a big part of that, share buybacks and high insider ownership. What is company management doing with those extra dollars of free cash flow? A number of studies have shown that companies that pay dividends do better over time than companies that don't pay dividends, and I think a lot of that is because they tend to be better stewards of the cash flow and they only pick the best projects, so again, good shareholder orientation really plays into that. The last one is undiscovered, underfollowed, misunderstood stocks. We have a small-cap background so in the small-cap space (maybe to some extent in the mid-cap space), that makes sense because there are companies that have very little, if any coverage. That gives us a leg up because 75% of our research is done in-house. When the market hates a company, that's the best time to get in it. If it is a stock that has a nice yield to it, it makes it a whole lot easier because then you are getting something positive out of it. Maybe you do have to hold it for a period before you start realizing some upside, but in the meantime you are getting paid to sit and wait.

Q: Anything new on your radar?

A: A Chilean brewer called Compania Cervecerias Unidas (CCU) is pretty new. It's the largest brewer in Chile, with a lot of additional drinks that they produce, and they are the largest bottled water producer as well. We started buying it before the earthquake hit actually [earthquake was in February], but they have managed to survive. From what I understand, there are several areas that have gotten pretty decimated in terms of manufacturing down there. But this business has held up very well. They just boosted their dividend a significant amount. The yield was relatively low, but they boosted it almost fourfold.

Q: Waste Management was your second-biggest holding, as of the end of February.

A: They have a couple of things going for them. In the past they were more intent in trying to grow revenue at the expense of margin, but they changed their philosophy and have concentrated more on just loosening their profitability instead, which is something we applaud completely. But the neat thing about that is, if an airline has a seat to sell, once the plane leaves the airport they can't sell that seat again. But with Waste Management, they own a lot of key landfill space. First, they are not making many new landfills, and secondly, if they don't sell that space today, they can sell it tomorrow at potentially a higher price. So the dynamics of that business model and the kind of predictability of waste is what we like. Even though people are trying to reduce waste, the company is in on the recycling side as well. It's just a very durable kind of business. Even in bad times, garbage is still generated.

Q: General Mills was another large name you own.

A: It's the second-largest cold cereal producer, after Kellogg (K). What's remarkable is that growing up, Kellogg just seemed to own the market. But I have three kids, and I looked in our cupboard the other day and we had maybe eight boxes of cereal and I think six of them were General Mills products. Cheerios is the largest cereal brand, which is theirs. The Cinnamon Toast Crunch, the stuff the kids love, they are all General Mills cereals, as is Chex and Wheaties. They have done a great job growing their business, and if you look at their charts since the downturn, the stock has done nothing but go up. It hit bottom at about $47 and it's up today -- I guess it's a little over $70. They raised their dividend twice last year, most recently 9% in July.

Q: Another food-oriented name is Sysco (SYY).

A: We first got into that in mid-December. It was a pretty dicey time. Who is going to be hurt because the consumers are cutting back? Well, it's going to be discretionary spending, and the No. 1 discretionary item is eating out. Sysco is the largest provider of products to restaurants. But they have over 400,000 customers, not just restaurants but hospitals, schools and hotels. They have this remarkable distribution system, and it's one of those things, like a moat like [Warren] Buffett talks about. They have had very stable operating margins between about a little over 4% and up to just a little over 5%. They have a really strong balance sheet and nice free cash flow. The stock is close to $30 now, but we still think it's pretty cheap because as the economy really recovers, a company like Sysco I would think would be on the front edge.

Q: Do you still like Procter & Gamble?

A: Historically, P&G yield has been around 1%, and it's always been pretty expensive. But in this downturn P&G's profits have held up really nicely, and they have continued to raise the dividend through this whole thing. So this downturn allowed us to get into it at a really good price. I'm probably not going to tell you anything new or exciting about P&G, but that's our angle.

Aston/River Road Dividend All Cap Value Fund (ARDEX)
Top 10 Holdings (as of February 28, 2010)
Waste Management WM
Cracker Barrel Old Country Store CBRL
Verizon Communications VZ
Spectra Energy SE
Sysco SYY
General Mills GIS
Clorox Company CLX
Automatic Data Processing ADP
McCormick & Company MCK
PepsiCo PEP
Source: Aston Funds, Morningstar

Disclosure: The Div Guy owns shares of PG, VZ, SE and PEP at the time of this post.

SmartMoney has a stock screen with believable yields of over 5%. 3 Stocks With (Believable) 5% Yields

A high dividend yield can signal that a company’s shares are a bargain or that trouble is looming. The job of the value investor is to tell the former case from the latter.

There’s no way to know for sure. Affordability measures, like the cost of the dividend divided by the amount of free cash flow, are no guarantee because healthy companies sometimes cut payments to afford acquisitions. However, by using such measures, investors can at least put the odds in their favor. There are other signs that dividends are safe, too. Recent sales growth is a sign that more prosperous days lie ahead, and a recent dividend increase beats management say-so as a judge of a company’s commitment to payments. Below are three companies with affordable-looking 5% yields and recent dividend and sales increases.

Verizon Wireless (VZ) - Dividend yield: 6.1%
Apple (AAPL) plans to produce an iPhone this year that could allow Verizon (VZ) and others to end AT&T’s (T) service monopoly for the gadget, The Wall Street Journal reported last week, citing anonymous sources briefed by the company. Expect Verizon to prosper either way. An iPhone partnership would bring a jump in sales, but only a stingy increase in profits, because carrier subsidies for the phone are the highest in the business and Apple doesn’t share its application sales with carriers. For the moment, Verizon enjoys wider profit margins than competitors, and free cash flow should swell this year as the company winds down spending on FiOS, its fiber-optic competitor to cable television.

Eli Lilly (LLY) - Dividend Yield: 5.7%
Like most of the big drugmakers, Eli Lilly (LLY) faces upcoming patent expirations. But as Jeffrey Holford of Jefferies and Company wrote to clients last month upon initiating coverage of the stock with a buy recommendation, Lilly is the “cheapest patent/cliff recovery play in the sector.” Shares trade at less than eight times this year’s earnings forecast, and the company has little debt, plenty of cash flow and a handful of promising drugs in its pipeline

Consolidated Edison (ED) - Dividend yield: 5.0%
Consolidated Edison (ED) transmits and delivers power to New York City and surrounding areas and has a rate structure that makes its returns highly predictable if slow-growing. Regulators recently agreed to allow the company to raise its rates by 12.6% over three years, which is less than management had asked for, but shares have nonetheless climbed since. The city’s jumble of wires and pipes is well more than a century old and provides ConEd with constant opportunities for investment, which the company in turn can use to bolster its appeals for rate hikes. Even assuming the stock price goes nowhere, the dividend yield reinvested is enough to double an investor’s money in a little over 13 years.

Disclosure: The Div Guy owns shares of VZ and T at the time of this post.

Barron's has a review of Aston/River Road Dividend All Cap Value Fund

ASTON/RIVER ROAD DIVIDEND ALL CAP VALUE fund is more than just a mouthful; it's a good measure of the income opportunities available outside the bond market these days.

The fund (ticker: ARDEX) yields 2.27%, far more than any but the longest-term Treasury securities. The five-year-old Louisville, Ky.-based fund invests primarily in dividend-paying common and convertible preferred stocks, real-estate investment trusts, closed-end funds and other publicly traded partnerships and royalty-income trusts.

"Studies have shown that over time, dividend-paying stocks outperform those that don't, and higher-yielding stocks outperform lower-yielding stocks," Sanders explains.

He and Forsha, with six analysts, built the portfolio from the bottom-up to identify what they believe are 60 to 80 misunderstood companies with attractive business models, solid balance sheets and shareholder-friendly managements who issue high and growing dividends. They pay particular attention to return on invested capital over time, expanding margins, rising cash flow and the nature of the demands on that cash. They want to make sure that the source of growth is robust enough to sustain rising distributions. The goal is to provide attractive, sustainable returns over the long term.

So far, so good. The no-load $277 million fund has topped the Standard & Poor's 500 over one-, three- and five-year periods. As of Nov. 3, it was up 22.61%, versus 16.95% for the broader index. It was down 1.30% for the trailing three years, compared with a 5.29% drop for the S&P. Over five years it was up 5.14%, against a 1.76% gain for the index.

Although they're always open to new opportunities, Sanders and Forsha sold off their REIT and closed-end fund holdings in 2009 because they got too pricey. Today they find better deals in stocks.

PetSmart (PETM) is a good example of the managers' approach. It's growing but remains generous to shareholders. They say the largest player in pet supplies is misunderstood because of concerns about consumer spending and the entry of Wal-Mart Stores (WMT) into the business. The team thinks the stock has an absolute value of 42, using a multiple of 7.5 times operating cash flow for fiscal 2011, less its net debt positions.

Aston/River Road Dividend bought the stock at about 24, right after the company announced a 233% dividend increase in 2009. The stock has since risen above 37, up more than 60% for the trailing year. They still like it. The industry is growing at a 5%-to-6% clip, and it raised its dividend again last June, this time by 25%; it also authorized a new $400 million share-purchase program.

"It shows you a mature retailer can return a ton of cash if managed properly," Forsha says. "It has gone from hyper-growth stage to cash harvesting." Consensus estimates call for earnings to hit $1.59 in 2010 and $1.97 in 2011.

Sanders calls General Mills (GIS) "the big pretty" because the maker of Cheerios has paid a dividend without fail for 111 years, and has raised its payout three times since 2009. The fund continues to buy it because Sanders thinks the cereal maker has managed through the cycle just about perfectly. "The weak economy suggested consumers would trade down, but their volumes were up for the first quarter of fiscal '11," says Sanders. Plus, its quarterly dividend is 30% higher than at the start of 2009.

At a recent 37.81, the shares are up more than 16% in the last year, but the portfolio managers think it could reach 41 based on a valuation of 10 times 2011 cash flow, less net debt. The Street expects earnings of $2.49 for 2011 and $2.70 for 2012.

Price appreciation like General Mills' is nice, says Sanders, but more than half of the fund's total return since its inception has come from dividends.

That's part of the reason the fund likes health-care equipment maker Owens & Minor (OMI), which took a hit because of fears about reimbursement under health-care reform. They bought it at about 28 in June '09, and at a recent 29.20, its sideways course neglects the fact that it's raised its dividend at an annualized rate of about 16% over the past 10 years. Early in the year, the increase was 15%, to 26.5 cents a share. The outfit distributes disposable gloves, needles and other throw-away medical equipment.

"The stuff is low-cost, and it is not apt to be cut in health-care reform," Forsha says. They value the stock at 35, based on a multiple of nine times cash flow for fiscal 2011, less its net debt position. Earnings are expected to come in at $1.92 in '10 and $2.08 in '11.

He and Sanders think the financial meltdown put Microsoft (MSFT) on sale.

"Some say it 'jumped the shark' when it started to issue dividends in 2003," Sanders says, borrowing a TV term used to describe a series that has reached its peak. But "since that time, they have shrunk the shares by almost 20%, while sales have grown by 94% and the return on equity has gone from 17% to 41%." Microsoft has $6 billion in debt but $36.1 billion in cash and equivalents, he notes. During its fiscal fourth quarter, revenue increased 22% year-over-year and operating income increased 49% year-over-year, driven by the release of Windows 7 and Office 2010.

Calling Microsoft an "enormously profitable free-cash-flow machine," Sanders says Aston/River Road Dividend fund bought it at about 22.50. At a recent 27.17, it is at a 22% discount to their absolute value of 35 a share, based on a multiple of 9.5 times FY '11 expected cash flow plus net cash and investments. Earnings are expected to be $2.10 in '10, $2.45 in '11 and $2.67 in '12.

Sanders and Forsha don't spend much time fretting about the direction of interest rates or the stock market as long as they can find companies with consistently high and growing dividends.

Top 10 Holdings Ticker Portfolio %
Waste Management WM 3.16%
McCormick & Comp MKC 2.42
Automatic Data Pro ADP 2.19
Kimberly-Clark KMB 2.19
United Parcel Service UPS 2.16
Clorox CLX 2.11
General Mills GIS 1.98
PartnerRe PRE 1.97
Sysco SYY 1.93
PepsiCo PEP 1.93

Disclosure: The Div Guy owns shares of PEP at the time of this post.

Here are the top 20 stocks in my Dividend Portfolio as of 10/29/10 ranked by size of holdings. I know some of these stocks no longer pay dividends but I have keep them for gains as the economy recovers. I will look to sell my stocks that are no longer paying dividends throughout 2010.

1. Kinder Morgan Energy (KMP) USA
2. DCP Midstream Partners (DPM) USA
3. Penn West Energy Trust (PWE) Canada
4. Barclays PLC (BCS) UK
5. American Capital (ACAS) USA
6. Procter & Gamble (PG) USA
7. Johnson & Johnson (JNJ) USA
8. CommonWealth REIT (CWH) USA
9. General Electric Company (GE) USA
10. ONEOK, Inc. (OKE) USA
11. Banco Santander (STD) Spain
12. Abbott Labs (ABT) USA
13. GlaxoSmithKline (GSK) UK
14. AT&T (T) USA
15. Unilever NV (UN) Netherlands
16. Aircastle Limited (AYR) USA
17. Verizon Communications (PEP) USA
18. Becton, Dickinson and Co (BDX) USA
19. Diana Shipping Inc. (DSX) Greece
20. Exxon Mobil (XOM) USA

Here are the top 20 holdings of the Vanguard High Dividend Yield ETF (VYM) as of September 30, 2010. The Fund consists of stocks that are characterized by higher-than-average dividend yields, and is based on the U.S. component of the FTSE Global Equity Index Series (GEIS). Real estate investment trusts (REITs), whose income generally do not qualify for favorable tax treatment as qualified dividend income (QDI) are removed, as are stocks that have not paid a dividend during the previous 12 months.

1. Exxon Mobil Corporation (XOM) USA
2. Microsoft (MSFT) USA
3. General Electric Company (GE) USA
4. Johnson & Johnson (JNJ) USA
5. Procter & Gamble (PG) USA
6. AT&T (T) USA
7. Chevron (CVX) USA
8. JPMorgan Chase (JPM) USA
9. Walmart (WMT) USA
10. Pfizer (PFE) USA
11. Coca-Cola (KO) USA
12. Merck (MRK) USA
13. Intel (INTC) USA
14. Pepsico (PEP) USA
15. Philip Morris International (PM) USA
16. Verizon (VZ) USA
17. ConocoPhillips (COP) USA
18. Abbott Labs (ABT) USA
19. McDonald's (MCD) USA
20. United Technologies (UTX) USA

My Annualized Dividend Income as of the end of October increased to $6,120 from $6,045 over the past couple of months. This means my dividend stocks will pay $6,120 in dividends over the next 12 months.

I made around $1,000 of dividend stock purchases over the past couple of months from new purchases and dividend distributions. The stock market has been very strong over the past couple of months and we continue to see companies increasing their dividends this year.

We have reached our 2010 Dividend Income Goal of $6,000. We started the year with $5,468 in annual dividends. I plan to continue selling off some stocks that are no longer paying dividend throughout the year and add a few hundred dollars a month to our dividend paying stocks.

Most of my stocks are held in my Zecco Trading account and the rest are DRIPs. The dividends from my stocks are reinvested but I am keeping track of the amount of income I could receive once I retire or choose to receive the dividends in cash.

I will post my Top 20 Stock Holdings on Wednesday.

As of the end of October our Net Worth increased to $881,776 from $833,701 for the month which is a 5.77% increase. The increase in net worth is tied to the nice increase for the stock market in September and October.

The breakout is as follows:
ASSETS
Retirement Accounts $453,928
Taxable Accounts $147,197
Cash $28,897
Home $205,000
Cars $7,200
Personal Property $3,000
Kids 529 Accounts $36,554

Here is the summary for this month:

The stock market was up around 4% for the month of September. The stock market had three very good months in a row. The market continues to perform well but the US economy still is showing signs of very slow growth.

We are still debt free since we paid off our credit card debt. We will continue to use our credit cards for rewards but payoff the balances each month. I received around $100 in dividends for the month and have used the cash from these dividends and $600 to make additional stock purchases.

We will be building up our cash over the next few months to increase our cash reserves. You can click on my Net Worth graph on the right to see the changes in each category from the previous month. We continue to fund our Roth IRA's each month.

I will post my Dividend Income Update on Tuesday.