A Dividend Champion Smackdown

Jun. 7.10 | About: The Clorox (CLX)

In a separate post, I discussed some of the differences among the 100 U.S. Dividend Champions (which can be found here).

Like many dividend-oriented investors, I try to focus on companies that reward their shareholders with regular dividend increases. But some firms do a better job of it than others, so I decided to run a screen focusing on percentage increases, yield, and consistency.

Step 1: Isolate companies (among the Dividend Champions) whose most recent increase was 10% or more. That gave me 18 companies to consider. (Sorry, Procter & Gamble (NYSE:PG), your 9.5% increase just missed the cut.)

Step 2: Eliminate any company whose last increase was more than a year ago. That eliminated three companies – AFLAC (NYSE:AFL), Illinois Tool Works (NYSE:ITW), and Helmerich & Payne (NYSE:HP).

Step 3: Eliminate the lowest yields. The payout of the 15 remaining companies ranged from 1.20% to 4.35% (as of May 28). Some people insist on yields of 3% or more; I decided to investigate the top eight, which yielded 2.39% or more. (Those yields may be up a bit after last week's action.) The lower yielders that were eliminated were: Becton-Dickinson (NYSE:BDX), Family Dollar Stores (NYSE:FDO), Hormel Foods (NYSE:HRL), Lowe's Companies (NYSE:LOW), Sigma-Aldrich (NASDAQ:SIAL), W.W. Grainger (NYSE:GWW), and Walgreen (WAG).

Step 4: Confirm the consistency of the dividend increases over 5 and 10 years. The following are the company name, symbol, number of years of increases, yield, latest increase percentage, and the percentage by which the dividend in 2009 had increased over 5 and 10 years:

Abbott Labs, ABT, 38, 3.70%, 10.0%, 52.2%, 136.4%

Clorox Company, CLX, 33, 3.50%, 10.0%, 77.8%, 152.6%

Colgate-Palmolive, CL, 47, 2.71%, 20.5%, 79.2%, 191.5%

Johnson & Johnson, JNJ, 48, 3.70%, 10.2%, 76.3%, 254.1%

Kimberly-Clark, KMB, 38, 4.35%, 10.0%, 54.5%, 131.1%

McDonald's, MCD, 33, 3.29%, 10.0%, 272.7%, 951.3%

Wal-Mart Stores, WMT, 36, 2.39%, 11.0%, 119.8%, 427.5%

Weyco Group, WEYS, 29, 2.96%, 13.3%, 176.2%, 357.9%

Although all had (simple) averages of more than a 10% increase in both the 5- and 10-year categories, I decided to eliminate the lowest (Abbott and Kimberly-Clark) in favor of the superior performers. I also eliminated the highest (McDonald's and Weyco Group) because the latest increase falls far short of its previous history.

Step 5: Compare the current annual dividend rate with the consensus estimates for this year and next to ensure that the payout ratio is reasonable. The following are the name, dividend rate, and 2010 and 2011 estimates (with payout percentage) of the “final four”:

Clorox Company, $2.20, $4.25* (51.8%), $4.59 (47.9%)

Colgate-Palmolive, $2.12, $4.87 (43.5%), $5.32 (39.8%)

Johnson & Johnson, $2.16, $4.83 (44.7%), $5.24 (41.2%)

Wal-Mart Stores, $1.21, $4.01** (30.2%), $4.39 (27.6%)

*Fiscal Year ends in June

**Fiscal Year ends in January

And the Winner is...You

Any of these four companies (and the others mentioned) would be a great investment. Although the best covered dividend might be Wal-Mart's, it also produces the lowest yield at 2.39%. Colgate-Palmolive had the largest recent increase, but it also yields less than 3%, so anyone leaning toward the higher yields might choose Clorox or Johnson & Johnson. More than anything, though, this exercise reinforces the notion that a well diversified portfolio is the way to go. And the Dividend Champions (along with more than 80 “Contenders”) provides plenty of possibilities.

Disclosure: Author owns ABT, AFL, BDX, CL, HRL, ITW, JNJ, KMB, PG