The manager of Cohen & Steers Dividend Value highlights all-weather companies. By Andrew Tanzer, Senior Associate Editor August 21, 2006 The outlook for inflation and interest rates is a bit blurry, but slower economic growth seems a better bet. In a cooling economy, stock investors tend to avoid the more speculative and cyclical businesses, searching instead for quality companies that will weather and flourish during rainy days. But how to identify these all-weather growers? One sensible strategy for a weak economy is to invest in companies that regularly boost their dividends. Indeed, there's a strong case that dividend growth works well long-term through various economic cycles. For instance, over the past 30 years, the return on stocks that increased dividends consistently beat those that did not raise dividends and trounced the performance of non-dividend paying shares. Rick Helm is an enthusiastic practitioner of dividend-growth stock selection. Helm runs Cohen Steers Dividend Value (symbol DVFAX), launched last year. Before that, he ran a similar fund for Washington Mutual. Helm says a company that consistently boosts its dividend at a healthy pace is one whose management has confidence in the enterprise's future. "No management raises dividends if it feels cash flows are at risk," he explains. This sort of corporation is also indicating a commitment to returning capital to shareholders. Helm likes firms that can consistently raise dividends at a pace of at least twice the annual inflation rate. So if consumer inflation is 5% today, he's looking for corporations that are lifting their dividends at least 10% a year. He focuses less on earnings (easily manipulated, he says) than on cash flows, "the lifeblood of any corporation," to determine if firms can continue to beef up the payout (cash flow is earnings plus depreciation and other noncash charges). Importantly, Helm zeroes in on dividend growth more than on high dividend yield. "I'd rather have a stock yielding 1% that raises the dividend 15% a year than a stock yielding 4% that isn't growing," he reasons. Overall, his fund yields about 2.4%, after expenses, compared with 1.9% for Standard Poor's 500-stock index. These four holdings exemplify Helm's affection for dividend growers: Aflac (AFL). The Japanese market represents 70% of the business of this Columbus, Ga.-based insurance company. Aflac yields only 1.2%, but its dividend rate has grown at a compounded rate of 22% a year over the past five years. Aflac's payout ratio (dividends as a percentage of profits) is a low 15%, which implies plenty of room for higher dividends. Helm thinks the firm can raise dividends by 15% to 20% annually over the next five years. Diageo (DEO). The leading liquor company (brands include Johnnie Walker and Tanqueray), Diageo is a classic defensive stock. The cash-rich British firm has boosted dividends by 11.5% annually for five years, and its American depositary receipts yield almost 3%. Procter Gamble (PG). Even recession shouldn't faze this big global purveyor of such consumer staples as razor blades and soap. PG, whose shares yield 2%, has boosted its dividend 11% a year over the past five years, a growth rate it should be able to sustain, says Helm. Wells Fargo (WFC). The big San Francisco-based bank has raised dividends 17% annually over the past five years, and its stock yields 3.2%. Helm says that cross-selling of financial products to customers is one key to WFC's consistent growth: The bank sells five products to each customer on average, compared with an industry norm of three.