Kevin O’Leary is Chairman of O’Shares Investments, but you probably know him as “Mr. Wonderful”.

He can be seen on CNBC as well as ABC’s Shark Tank. Investors who have seen him on TV have likely heard him discuss his investment philosophy.

Mr. Wonderful looks for stocks that exhibit three main characteristics. First, they must be quality companies with strong financial performance and solid balance sheets.

Second, he believes a portfolio should be diversified across different market sectors.

Third, and perhaps most important, he demands income—he insists the stocks he invests in pay dividends to shareholders.

The O’Shares FTSE U.S. Quality Dividend ETF (OUSA) owns stocks that display a mix of all three qualities. It is an intetersting resource to look for quality dividend growth stocks.

This article will analyze the fund’s top 10 holdings.

No. 10: Altria Group (MO)

Altria one of the 4 publicly traded ‘big tobacco’ corporations – it is also the largest tobacco company in the U.S. Approximately 90% of its earnings come from cigarettes. It also has cigar and wine businesses, as well as smokeless tobacco products.

(Click on image to enlarge)

Source: Annual Shareholder Meeting presentation, page 6

Altria is what’s known as a sin stock. These are companies that sell products that have an adverse health effect. For investors, this connotation might as well be a badge of honor.

Sin stocks have been among the market’s strongest performers. For example, according to Altria, its stock delivered a total shareholder return of 204% from 2011-2015.

Any company that triples its investors’ money in a five-year span is clearly doing something right. Altria’s golden goose is the Marlboro brand.

(Click on image to enlarge)

Source: Annual Shareholder Meeting presentation, page 9

Marlboro alone controls nearly half of U.S. cigarette market share.

In addition, Marlboro’s chewing tobacco products, led by Skoal and Copenhagen, are top brands in the smokeless category.

(Click on image to enlarge)

Source: Annual Shareholder Meeting presentation, page 10

Tobacco is a highly lucrative business. It is not a capital-intensive business. And, Altria sells an addictive product, which gives the company tremendous pricing power.

This results in huge levels of free cash flow. For example, Altria generated $3.3 billion of free cash flow over the first nine months of 2016.

Altria’s free cash flow allows it to pay a hefty shareholder dividend.

The company needed just $128 million for capital expenditures over the first three quarters of the year. And, tobacco companies are banned from advertising in the U.S.

This leaves more cash left over to use for dividends. Altria is a Dividend Achiever. 

Looking back further, Altria has increased its dividend 50 times in the past 47 years. Because of this, it is one of the most famous dividend stocks in history.

The stock has a current yield of 3.6%.

No. 9: Philip Morris International (PM)

Philip Morris International operates the Marlboro brand outside the U.S. It operates in several markets with higher economic growth than in more developed markets.

PM benefits from leading market share rates across several key operating regions.

(Click on image to enlarge)

Source: Annual Shareholder Meeting presentation, page 7

The company was spun off from Altria in 2008, so that it could be free to operate on its own, without the stricter U.S. regulations weighing it down.

But it’s PM that has suffered since the split. It has had to deal with a brutal foreign exchange market, resulting from the strong U.S. dollar.

A higher U.S. dollar makes exports less competitive, and reduces the value of revenue generated overseas. PM’s revenue and earnings-per-share declined 10% and 12%, respectively, in 2015. Unfavorable currency fluctuations shaved nearly $5 billion off of PM’s revenue for the year.

The good news is that, thanks to its strong business model, PM has remained highly profitable. Excluding the effects of currency, revenue and earnings-per-share rose 2.5% and 2.2% through the first nine months of 2016, respectively.

The company expects full-year 2016 earnings-per-share, adjusted for currency and one-time costs, to rise 10.5%-11.5% from 2015.

Pricing is a big reason why the company can grow in spite of currency. PM expects 8%-9% higher prices in the fourth quarter.

This has allowed it to continue raising its dividend, even during a very difficult operating environment. PM has more than doubled its dividend payout since its 2008 spin-off.

Moving forward, the company is turning to product innovation for growth. A primary growth catalyst for PM is its reduced-risk portfolio. This is the name management has given to its heated tobacco product, iQOS.

(Click on image to enlarge)

Source: Global Consumer & Retail Conference presentation, page 5

iQOS is now available in key cities in 13 markets, and the company expects iQOS to have a presence in 20 markets by the end of this year.

Strong brands and growth in new products means PM can sustain its 4.5% dividend yield.

No. 8: AT&T (T)

It should be no secret to see two tobacco companies on this list. Nor should it be a surprise to see telecom giant AT&T make the list.

Like tobacco stocks, telecom stocks generate huge amounts of cash flow and pay hefty dividends to shareholders.

AT&T raked in $16.6 billion of free cash flow in 2015, and paid $10.2 billion of dividends for the year.

AT&T is a Dividend Aristocrat, a group of companies in the S&P 500 with that have raised their dividends for at least 25 consecutive years.

AT&T has increased its dividend for 33 years in a row.

It can do this because of its highly stable business model. AT&T provides telephone, Internet, and phone service. These are services that the average American does not want to do without, even when the economy deteriorates.

Business conditions have remained strong throughout 2016. For example, revenue and earnings-per-share rose 4.6% and 8%, respectively, last quarter.

(Click on image to enlarge)

Source: Time Warner Acquisition presentation, page 13

Since it generates such consistent profits, AT&T can reward shareholders with a hefty dividend. The current yield is 4.6%.

Its dividend increases are typically small, in the 2%-3% range. That is because the U.S. telecom industry is very mature and fiercely competitive.

Going forward, AT&T is banking on acquisitions to drive future growth.

First, AT&T acquired major competitor DirecTV for $67 billion including debt. The deal instantly made AT&T the largest pay TV provider in the world, with more than 26 million customers in the U.S. and another 19 million customers in Latin America.

More recently, AT&T announced a massive $109 billion deal for Time Warner. This is a huge deal, that would make AT&T a leader in premium content as well as content distribution.

(Click on image to enlarge)

Source: Time Warner Acquisition presentation, page 6

Not only would AT&T see a huge bump in revenue from the customer additions, earnings-per-share can grow from cost synergies. Since they are similar companies, AT&T expects the deal to be immediately accretive to margins, free cash flow, and earnings-per-share.

Due to these two very large acquisitions, AT&T should have no trouble raising its dividend each year moving forward.

No. 7: Pfizer (PFE)

Pfizer makes this list, because health care stocks have historically been among the market’s best dividend stocks.

Pharmaceutical companies benefit from the fact that many people cannot go without their medications. This heavily insulates Big Pharma’s bottom line.

And, pharmaceutical companies have the ability to raise prices on key drugs. Because of this, health care stocks like Pfizer are tremendous dividend payers.

Pfizer stock offers a 3.9% dividend yield. The company also returns billions to investors through share repurchases. Over the first nine months of 2016, Pfizer returned $10.5 billion to investors in combined dividends and share buybacks.

The company has performed very well in 2016. Revenue rose 8% last quarter, while adjusted earnings-per-share increased 2%.

This may seem fairly ordinary. But Pfizer’s performance is impressive, given the difficult environment for global pharmaceuticals this year.

In 2016, Pfizer has dealt with increasingly regulatory pressure regarding drug prices. In the international markets, Pfizer is suffering from the Brexit vote uncertainty, as well as the strong U.S. dollar.

(Click on image to enlarge)

Source: Third Quarter Earnings presentation, page 9

If that weren’t bad enough, Pfizer is still feeling the effects of the loss of patent exclusivity on Lipitor, which was once its most important individual product.

Pfizer has responded by investing heavily in R&D, to restock its drug pipeline.

(Click on image to enlarge)

Source: Citi Global Healthcare Conference, page 3

Pfizer has a robust pipeline, including dozens of late-stage products. It is counting on its product pipeline to replace Lipitor and continue growing sales and earnings.

This growth will help support future dividend growth as well. Pfizer recently increased its dividend by 6.7%.

Pfizer expects to generate earnings-per-share of $2.41 in 2016. Its current dividend rate of $1.28 per share amounts to a payout ratio of 53%, which means future dividend growth is likely.

No. 6: Procter & Gamble (PG)

Procter & Gamble is a stalwart among dividend stocks. It has increased its dividend for the past 60 years in a row.This makes the company one of only 18 Dividend Kings – stocks with 50+ years of rising dividends.

It has done this by becoming a global consumer staples behemoth. It sells its products in more than 180 countries around the world. P&G generates more than $65 billion in annual sales.

The company is organized into five operating segments:

• Fabric and Home Care (32% of sales)
• Baby, Feminine, and Family Care (28% of sales)
• Beauty (18% of sales)
• Grooming (11% of sales)
• Health Care (11% of sales)

P&G has a heavy international presence; it generates 56% of its sales from outside North America.

But this is not a business-as-usual climate for P&G. The company’s sales fell 8% in fiscal 2016, and 5% in fiscal 2015.

The strong U.S. dollar played a significant role in P&G’s sales declines. But it is also struggling to grow the core business.

Organic sales, which excludes the effects of currency translations, increased just 1% in fiscal 2016.

The company has responded by overhauling its product portfolio. P&G has sold off dozens of low-growth brands, in an attempt to streamline its operations.

Before its turnaround, P&G had approximately 170 brands in its portfolio. Now, it has 65 brands.

Going forward, it is focusing on a select group of core brands, which management believes hold the most growth potential.

(Click on image to enlarge)

Source: Analyst Meeting presentation, page 53

The strategy appears to be working. P&G returned to organic growth in the first quarter of fiscal 2017, with a 3% increase. It enjoyed broad-based growth across its product categories.

(Click on image to enlarge)

Source: Analyst Meeting presentation, page 7

P&G management projects 2% organic sales growth for the full-year fiscal 2017.

In addition, P&G is aggressively cutting costs to boost profitability. The company has removed billions of dollars in costs from its supply chain.

(Click on image to enlarge)

Source: Analyst Meeting presentation, pages 18 & 20

P&G has also cut costs by reducing headcount approximately 25%.

It is hoped that this growth will help accelerate the company’s dividend growth, which has slowed lately. For example, P&G’s 2016 dividend raise was just 1%.

In the meantime, the stock has an attractive 3.2% dividend yield.

No. 5: Microsoft (MSFT)

Taking the number five spot on Mr. Wonderful’s dividend stock portfolio is Microsoft, and it is easy to see why.

Microsoft perfectly epitomizes what Mr. Wonderful looks for. It is a strong brand, and the company generates high margins.

Microsoft is simply a cash machine. In fiscal 2016, the company generated $25 billion of free cash flow. It used this cash flow to repurchase $16 billion of its own stock, and pay another $11 billion of dividends to shareholders.

Business conditions have remained strong in the current fiscal year. Excluding the effects of currency, adjusted revenue and earnings-per-share increased 5% and 13%, respectively, in the fiscal 2017 first quarter.

Microsoft enjoyed a strong performance across its two core operating segments, Productivity and Business Processes, and the Intelligent Cloud.

Office 365, Microsoft’s cloud-based software suite, grew revenue by 54% in constant currency. This drove 5% revenue growth in Office commercial products and cloud services revenue.

(Click on image to enlarge)

Source: Q1 Earnings Presentation, page 7

Separately, Intelligent Cloud constant-currency revenue increased 10% last quarter, driven by growth in server products.

(Click on image to enlarge)

Source: Q1 Earnings Presentation, page 9

Microsoft has a 2.5% dividend yield, which may not seem too exciting. Even more attractive is Microsoft’s dividend growth.

It has increased its dividend by 14% each year on average over the past five years.

Lastly, Mr. Wonderful looks for companies with strong balance sheets. Microsoft is a perfect example of this. It ended last fiscal quarter with $137 billion of cash and investments on its balance sheet.

Microsoft’s excellent balance sheet and growth from cloud computing should ensure continued dividend growth for many years to come.

No. 4: Verizon Communications (VZ)

Just as AT&T holds a place in Mr. Wonderful’s portfolio, so too does Verizon, AT&T’s main competitor.

Verizon is a massive company—revenue grew 3.6% in 2015, to $131 billion.

Verizon generated $21 billion of free cash flow in 2015. With such huge levels of free cash flow, Verizon paid $8.5 billion of dividends to shareholders, and repurchased $9.3 billion of stock.

There was plenty of cash flow left over to repay some of the debt incurred when Verizon acquired Verizon Wireless from Vodafone (VOD).

Things have gone well so far in 2016. Last quarter, Verizon’s adjusted earnings-per-share fell 2.9%, but the company still earned $1.01 per share.

(Click on image to enlarge)

Source: 3Q Earnings presentation, page 6

This was more than enough to cover the company’s dividend payment.

Even better, Verizon has very high profit margins, thanks to its high-quality customer base. Verizon is able to attract higher-quality customers because of its industry-leading network.

(Click on image to enlarge)

Source: 3Q Earnings presentation, page 8

Wireless customer churn was less than 0.9% last quarter. Its total wireless retail connections rose 2.9% last quarter, to 113.7 million.

This provides the company with pricing power. Verizon’s EBITDA margin was 44.9% for the wireless business last quarter, which was up 170 basis points year over year.

Over the first nine months, Verizon generated $6.2 billion of free cash flow.

Going forward, Verizon’s growth catalysts will be in 5G, digital advertising, and the Internet of Things.

Growth is very exciting in these areas. First, Verizon plans a test roll-out of 5G network capability in 2017.

Separately, Verizon acquired AOL to boost its digital advertising business. Last quarter, AOL’s net revenue increased 10%.

Finally, connectivity is a compelling growth catalyst. IoT revenue rose more than 30% last quarter.

This growth should allow Verizon to continue raisin its dividend. Verizon stock pays a 4.3% current dividend yield. The company has increased its dividend for 10 consecutive years.

No. 3: Exxon Mobil (XOM)

Exxon Mobil is the only oil stock on Mr. Wonderful’s top 10 list. This makes sense, because if an investor is going to own only one Big Oil stock, it should be the biggest of the oil and gas ‘super majors’.

Exxon Mobil is the largest publicly-traded oil company in the world. It has a $376 billion market cap and an unparalleled dividend track record among its peer group.

The company has paid a dividend for more than 100 years. And, it is a Dividend Aristocrat. Exxon Mobil has increased its dividend for more than three decades.

This is an especially challenging period for Exxon Mobil. Oil and gas prices have fallen by about 50% from their 2014 peak levels.

The huge drop in commodity prices has weighed on Exxon Mobil. Fortunately, the company has cut costs, raised cash through asset sales, and has benefited from its integrated model.

This helped Exxon Mobil remain profitable in 2015, and continue to raise its dividend.

(Click on image to enlarge)

Source: Annual Meeting presentation, page 15

Exxon Mobil’s strong business model has allowed the company to generate industry-leading returns on capital.

The company has remained profitable throughout 2016. One reason is because of its integrated business model. In addition to upstream exploration and production, Exxon Mobil has large downstream and chemicals businesses.

Activities like refining and chemicals are not as adversely affected from falling commodity prices. These segments have continued to generate profit, which is helping to balance out the poorly-performing upstream business.

Investors are hoping the bottom is in for Exxon Mobil, and there is some evidence of this. While third-quarter earnings fell 37% year over year, earnings increased 56% on a quarter-over-quarter basis.

(Click on image to enlarge)

Source: 3Q Earnings presentation, page 8

Maintaining profitability is crucial for a company, in order to continue raising its dividend. And, Exxon Mobil will be a major beneficiary if commodity prices continue to rise moving forward.

Exxon Mobil stock has an attractive 3.3% dividend yield.

No. 2: Johnson & Johnson (JNJ)

J&J is one of the best dividend stocks investors can buy, so it is not surprising to see it in Mr. Wonderful’s portfolio.

The company has raised its dividend for 54 consecutive years.

Its long history of dividend growth is thanks to J&J’s excellent business model. J&J has a very strong brand—approximately 70% of the company’s sales come from products that have either the number one or number two positions in their respective categories.

This brand strength has led to consistent growth for decades. According to J&J, it has achieved growth of adjusted earnings for the past 32 years in a row.

J&J is organized into three business segments:

• Pharmaceutical (47% of sales)
• Medical Devices (35% of sales)
• Consumer (18% of sales)

It is seeing strong results in each of its businesses. Over the first nine months of 2016, total sales increased 2.9% year over year. Excluding the effects of currency, revenue rose 4.5% in that time.

The pharmaceutical business is performing the best so far this year, with 9.1% revenue growth through the first nine months.

The consumer business has grown at the slowest rate, with revenue up 0.4% through the first three quarters. But J&J’s consumer business is very valuable to the company, because it has many strong brands that provide a great deal of stability.

(Click on image to enlarge)

Source: Consumer and Medical Devices presentation, page 50

Lastly, moving forward J&J has a robust pharmaceutical pipeline to generate growth.

(Click on image to enlarge)

Source: 3Q Earnings presentation, page 27

J&J stock has a price-to-earnings ratio of 20, so it could be slightly undervalued. The stock also has a 2.8% dividend yield and is very likely to raise its dividend each year moving forward.The company ranks highly using The 8 Rules of Dividend Investing.

No. 1: Apple Inc. (AAPL)

Taking the number one spot in Mr. Wonderful’s dividend stock portfolio is tech giant Apple. Apple stock comprises 5.5% of the fund’s holdings.

Mr. Wonderful looks for strong brands and excellent balance sheet. There is arguably no single stock that epitomizes both qualities better than Apple.

According to Forbes, Apple is the most valuable brand in the world, worth $154 billion. Apple’s strong brand enables its customer retention and pricing power.

In addition, Apple has a pristine balance sheet that is loaded with cash. The company ended the last fiscal quarter with $67 billion in cash, cash equivalents, and short-term marketable securities on its balance sheet.

The company also has $170 billion in long-term investments.

That makes a grand total of $237 billion in total cash, which represents approximately 38% of Apple’s market cap.

Such a huge cash hoard allows Apple to invest in the business, and reward shareholders at the same time.

Apple has produced excellent growth in sales and earnings-per-share over the past five years. From 2012-2016, Apple grew revenue and earnings-per-share by 38% and 32%, respectively.

And yet, Apple stock only matched the S&P 500 Index performance from 2011-2015, despite its strong growth.

(Click on image to enlarge)

Source: Apple 10-K, page 23

This could make Apple stock a great bargain. Shares trade for a price-to-earnings ratio of 14. By comparison, the S&P 500 Index trades for a price-to-earnings ratio of 26.

Apple stock is cheap, and the company has several growth catalysts moving forward. These include growth from new iPhone releases, as well as the company’s services business.

Services are a huge category for Apple. Last quarter, services revenue increased 24% year over year and hit a company record.

Apple stock has a 2% current dividend yield. And, the company intends to raise its dividend by at least 10% per year going forward.

Apple is a great blend of growth, value, and income. It is rare to find stocks that have a mix of all three qualities, which is why Apple is Mr. Wonderful’s number one holding.