Many consumer staples companies pay dividends. Among the 117 consumer staples companies that are included in the Russell 3000 index, 78 companies pay dividends. The average annual dividend yield of these companies is 2.32% while the median is 2.03%. Vector Group Ltd (NYSE:VGR) has the highest yield at 10.08%, and Seaboard Corp (NYSEMKT:SEB) has the lowest yield at 0.11%.
In this article, I tried to determine which of the Russell 3000 consumer staples companies is the most attractive for dividend-seeking investors.
I consider that besides healthy dividend yield, low payout ratio and consistent dividend growth are the most crucial factors for dividend-seeking investors. In addition, since dividend investors try to avoid too much risk, The Sharpe ratio, which measures the ratio of reward to risk, is also extremely important.
I have screened the Russell 3000 consumer staples companies that pay dividends according the above-mentioned principles.
The screen's method requires all stocks to comply with all following demands:
- The payout ratio is less than 100%.
The annual rate of dividend growth over the past five years is greater than zero.
The forward dividend rate is equal or greater than the trailing dividend rate.
Sharpe ratio is greater than 1.0.
Furthermore, I ranked all the stocks that complied with all the required demands according to a formula that I constructed, which gave 35% weight to the yield, 35% to the payout ratio, 20% to the dividend growth and 10% to the Sharpe ratio.
In order to find out how such a ranking formula would have performed during the last 14 years, I ran a back-test using the 406 Russell 3000 companies that pay dividends and comply with all the above-mentioned demands.
The back-test results are shown in the chart below. For the back-test, I divided the 406 companies into ten groups according to their ranking. The highest ranked group with the ranking score of 90-100, which is shown by the dark green column in the chart, has given by far the best return, an average annual return of almost 21%. Also, the second and the third group (scored: 80-90 and 70-80) have given superior returns. This brings me to the conclusion that my ranking system is useful.
After running this screen on June 16, 2013, I discovered 34 consumer staples stocks which comply with all the demands.
The table below presents the best twenty companies in the order of their rank.
The table below presents the dividend yield, the payout ratio, the annual rate of dividend growth over the past five years and the Sharpe ratio for the twenty companies.
The table below shows the most influential parameters, for dividend-seeking investors, for the eight best ranked Russell 3000 consumer staples companies according to my criteria.
Which of the eight consumer staples companies is the most attractive for dividend-seeking investors? It is not easy to determine. All the eight stocks look quite attractive to dividend-seeking investors due to their solid dividend yield and their long-term track record of consistent and rising dividend payments. Cal Maine Foods Inc (NASDAQ:CALM) has the highest dividend yield among the eight companies at 3.65% and its payout ratio is only 32%. Inter Parfums Inc (NASDAQ:IPAR) has the lowest dividend yield among the eight companies at 1.50% and its forward P/E is high at 29.63. Safeway Inc. (NYSE:SWY) has a good dividend yield of 3.28%, but its Sharpe ratio is the lowest among the eight companies at 1.19. Kroger Co. (NYSE:KR) has a dividend yield of only 1.72%. General Mills Inc. (NYSE:GIS) has a good dividend yield of 3.08%, but its trailing and forward P/E are quite high at 18.05 and 16.82. respectively. Coca-Cola Enterprises Inc (NYSE:CCE) has a dividend yield of 2.21% and its earnings growth prospects are quite good. CVS Caremark Corp (NYSE:CVS) has a dividend yield of only 1.52%. Clorox Co (NYSE:CLX) has a good dividend yield of 3.33%, but its debt-to-equity ratio is very high at 16.85.
Considering all these factors, I can't see any one stock which is clearly superior to the others. In my opinion, a portfolio of the four stocks: CALM, SWY, GIS and CCE can give a satisfying long-term return to the dividend investor.
All the data for this article were taken from Portfolio123.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.