Dividend of the Week

Our initial criteria are: an annualised yield over three dividends of greater than 4 per cent; a market capitalisation greater than £2bn; dividend cover greater than one times; and a record of consecutive annual dividend increases (CADI) of greater than five. Additionally, the company must be expected to increase the dividend in each of the next three sets of results. This initial screening throws up 24 companies using the DividendMax tools.

In an effort to find companies with plenty of cash backing, which should give us more confidence in their ability to keep growing dividends, we are adding in a final criterion: the company must also be undertaking share buybacks at some point during the 2013 calendar year. This reduces the longlist to 10 companies. We then look at other factors to reach our shortlist.

Firstly, we will exclude Admiral (ADM), Vodafone (VOD), British Sky Broadcasting (BSY) and BHP Billiton (BLT) as they have already been nominated as dividends of the week in the past three months. This leaves us with Imperial Tobacco (IMT), GlaxoSmithKline (GSK), BAE Systems (BA.), Wm. Morrison (MRW), Centrica (CNA) and Amec (AMEC).

All of these companies have bought back their own shares during 2013 and have tremendous track records of growing dividends. To further distil the list, we are going to pick out the four stocks with the best records for consecutive dividend payment increases. On the basis of longevity of the payout, the two companies to fall by the wayside are Morrison, which held its payout in 2005-06 and BAE Systems, which did likewise in 2003. The others, Amec, Imperial Tobacco, GlaxoSmithKline and Centrica have all increased dividends every year for at least the past 10 years.

Looking at the fundamentals we have:

As always, at this stage further elimination becomes very difficult. But, on the fundamentals, Centrica, trading on a forward PE ratio of 14.4 times earnings, looks just a little expensive compared with the rest. Its shares are currently trading just a penny shy of their all-time high and go ex-dividend on Wednesday 25 September, which is likely to push the shares down a little. The other three stocks have retreated from recent highs, with Amec at 1,110p (1,172p high), GlaxoSmithKline at 1,577p (1,782p high) and Imperial at 2,303p (2,534p high).

Let's have a look at the dividends paid by each of the remaining companies over the past six to seven years:

Imperial Tobacco

2013 Interim 35.2p (paid)

GlaxoSmithKline

2013 Q1 18p, Q2 18p

Amec

2013 interim dividend of 13.5p (declared and goes ex-dividend on 27 November)

Imperial Tobacco is probably the safest in terms of the predictability of the dividends, with analysts pencilling in around 10 per cent growth in the dividend this year. This has already been exceeded at the interim stage with an 11 per cent increase. The shares have had a good little run recently after hitting a low for the year of 2,120p on 27 August.

In its recent half-yearly report, management stated that it expected to grow earnings per share at the lower end of its earnings model, by 4-8 per cent a year before the beneficial effect of share buybacks. Again, in the results the company reiterated its stated dividend policy of aiming to grow the dividend by at least 10 per cent a year "over the medium term". At the interim stage, Imperial had spent £295m acquiring 12.3m shares as part of its annualised £500m share buyback programme. Imperial carries a 'healthy' level of net debt at around £11.2bn and has interest cover of 5.4 times.

GlaxoSmithKline is a dividend-paying monster, having increased its dividend each year for more than two decades. Dividend increases follow a fairly set formula that does need adjusting every now and then or shareholders will face ever-shrinking percentage dividend increases. The last adjustment was in 2011 when the final of the four quarterly dividends was increased by more than the usual. Another one is due soon and could happen this year, with the final increasing to 24p instead of the expected 23p.

The second-quarter results in July delivered the very predictable dividend of 18p and confirmed that total share repurchases for 2013 are expected to be worth £1bn-£2bn. Like Imperial, GlaxoSmithKline carries a 'healthy' net debt of £15.7bn.

Amec also has an incredible track record of increasing dividends to shareholders that exceeds even those of GlaxoSmithKline and Imperial Tobacco and yet is hardly considered by anybody to be a dividend champion. Its recent statement regarding Kentz Corporation (KENZ), where it stated that it had "no intention to make an offer for Kentz", was well received by investors. In particular, those with an interest in the potential for cash returns will have noted the additional line that "the pipeline of opportunities remains strong, and depending on the progress of acquisitions, additional cash returns to shareholders will be considered in the fourth quarter of 2013".

The interim dividend was increased by 15 per cent and we can expect at least the same at the final stage, again way ahead of GlaxoSmithKline and a few percentage points ahead of Imperial. Furthermore, a share buyback programme worth £400m was completed on 8 February 2013.

Given the dividend increases of the past five years of 96 per cent for Imperial, 54 per cent for GlaxoSmithKline and 200 per cent for Amec - and also given the future prospects for dividend increases - Amec just pips Imperial Tobacco to the post and is our dividend of the week. Had Imperial not risen by almost 200p per share in the past two to three weeks, it probably would have made the top spot this week.

For Amec, we are estimating the next three dividends to be 13.5p, 28.5p and 15.4p. The shares were trading at 1,107p at Friday's close. At 1,107p, this will generate a return of 4.4 per cent annualised over a 16-month period.

Amec yield calculation:

13.5 (declared) + 28.5 + 15.4 = 57.4p between now and 26/11/2014 (approximate ex-dividend date of the third dividend)

Ergo 57.4p / 1107 = 5.18% 5.18% annualised = (5.18x365) / 429*= 4.40%

*Number of days until theoretical ex-dividend of the third dividend.

Note that if the dividend forecasts are correct, the actual yield (which DividendMax calls the 'Optimized' yield) is affected by two factors; the share price and the proximity to ex-dividend dates. DividendMax performs these calculations daily against hundreds of stocks in the UK and overseas, producing new lists every day as prices change, dividends change and ex-dividend dates approach.