This is the third and final article of a series of articles we have prepared on dividend paying stocks with a history and legacy of increasing their dividends each year. Our first article covered Dividend Champions, dividend paying stocks with a history of increasing the dividend every year for at least 25 years and can be found here. Our second article covered Dividend Contenders, companies that have increased their dividend every year for10 to 24 years, and can be found here. This final article in the series will cover Dividend Challengers, companies that increased their dividend every year for a minimum of five, to up to nine consecutive years. Each of these lists are courtesy of David Fish and can be found here.

We have long believed that investing in dividend paying stocks, especially blue chips with a legacy of increasing their dividend consistently year-after-year, has always been an attractive and sound idea. Common sense would dictate that if the company is able to increase their dividend every year, then it would logically follow that their earnings must also be increasing every year. Dividends are paid out of earnings and therefore, a company that is constantly increasing their dividends is likely to also be constantly increasing its earnings. On the other hand, there are many different levels and rates of growth.

For example, on the more mature dividend growth lists of Champions and Contenders, there are many utility stocks to be found. Although they grow their dividends and earnings each year, the rate of growth is usually rather slow ranging between 2% to maybe as high as 6% or 7%. On the other hand, there are also companies that are growing their earnings at rates of 12% to 15% or even higher that can also be found on these same lists. Typically, the faster growing stocks will offer a lower current yield but obviously a faster rate of compounding and, therefore, a greater potential for a higher total return. Depending on the specific company, a lower starting, but faster growing dividend can end up generating a larger total dividend stream-long term.

Regarding Dividend Challengers, a significant number of companies on this list will be stocks that are moving from pure growth, to growth and dividend. Technology stalwarts such as Microsoft (MSFT) or Intel (INTC) are classic examples of dividend challengers morphing from growth to yield. Consequently, the Dividend Challengers' lists can be a fertile field for candidates that have the potential to offer a higher total return. In this context, the dividend may represent more icing than cake. Whereas, on the other hand, the dividend yields from more mature and perhaps slower growing higher-yielding blue chips may represent more cake than icing.

Microsoft and Intel Morphing from Growth to Yield

Looking at the technology companies Microsoft (MSFT) and Intel (INTC) through the lens of F.A.S.T. Graphs™ there are several interesting factoids that are revealed in graphic form. First of all, we can see how insanely overvalued technology was during the irrational exuberant period that ended in the spring of 2000. However, these technology stalwarts became so overvalued at that time that future capital appreciation was severely reduced. Of the two, it is clear that Microsoft had the best record of earnings growth since calendar year 1998, but also remained overvalued longer than Intel did. Also, we can see that Intel has paid a dividend for a much longer period of time, however, it was rather small until calendar year 2004. Notice that Microsoft paid a one-time special dividend of three dollars per share in calendar year 2005.

As we look to the future, the earnings and price correlated F.A.S.T. Graphs™ reveal that both of these technology stalwarts appear to be undervalued at this time, after being overvalued for such a long time. Moreover, both of these companies are expected to achieve similar future earnings growth over the next five years. Microsoft is expected to grow at 11% while Intel is expected to grow at 10%.

Dividend Stocks Come In Many Flavors

The point is that there are many different varieties and types of dividend paying common stocks. Furthermore, even though some of the attributes discussed above are relevant and more commonly apply to the specific list discussed, each of the lists contain at least a few examples of all the flavors of dividend paying stocks discussed so far. But an even more important point that we're attempting to make, is that not all dividend common stocks can be placed in the same basket. There many different types of dividend paying stocks, with different levels of risk, different yields, different growth rates, etc. Therefore, generalized discussions of whether dividend stocks are preferable over non-dividend paying stocks are rather silly,in our humble opinion. Nevertheless, they rage on.

After screening the list of more than 200 Dividend Challengers, we offer the following 32 companies that are expected to generate total returns in excess of 15% per annum. We chose the 15% number in order to illustrate the notion that dividend paying common stocks are capable of generating very attractive total returns. However, consistent with the thesis of this article, we also offer this list to illustrate how varied and different dividend paying stocks can be, even when they offer similar total returns.

Therefore, we present this list of 32 potentially above-average total return achievers differently than we have in the past two articles. We present this list broken down by order of expected earnings per share growth rates from lowest to highest, and then from market capitalization from large-cap to small-cap. We present this list in this manner in order to accentuate the many different flavors that dividend paying stocks come in. Also note the different current yields that can be found in each of the segments as presented below.

Conclusions

With this final article we have attempted to clearly illustrate how different dividend paying common stocks can be. Consequently, we further contend that the notion of investing in dividend common stocks is a very multifaceted concept. We have also come across arguments regarding whether dividend yield is preferable over total return and/or vice versa. Once again, we find these kind of arguments rather silly, and usually misguided.

We believe that total return is important, however, we also believe that exceptional total returns can be achieved at lower levels of risk through dividend paying stocks. Also, for the true long-term holder, the rising dividend can and actually should be more important than short-term capital appreciation. This is most true when the investor has no intention of selling their dividend grower. Price levels only truly matter if a sell is eminent. Otherwise, price volitility can be ignored, as long as fundamentals remain intact and strengthen.

Just as there are many different variations of dividend paying common stocks, there is an even wider variation of investors each with their own unique goals , objectives and risk tolerances. In truth, investing is a very personal exercise where one size does not fit all. Therefore, the discerning investor needs to consider all factors before designing and implementing their own investment strategies. There are no easy answers, but there are rational and intelligent solutions that can and should be applied. But at the end of the day, we believe it's about building your equity portfolios one stock at a time. A focus on the specifics is always more relevant than generalizations.

Finally, the above list of potential candidates from the Dividend Challengers' list offer choices that could fit the needs and goals of many different types of investors. However, it should be recognized that not all Dividend Challengers are the same. And perhaps most importantly, it should also be recognized that this list represents only the starting point prior to a more comprehensive research effort that should be initiated before any money is invested.

Disclosure: Long MSFT, INTC, BBY, LLL and LMT at the time of writing.