Dividend Champions Smackdown II
Last month, I screened the Dividend Champions list of companies that have paid higher dividends for at least 25 straight years (which can be found here) in an attempt to focus on those with the most consistent percentage dividend increases and sustainable yields. That effort came up with some great companies, but some investors expressed a desire for somewhat higher yields. The result may have included more of those if the screen hadn't started with a very high hurdle. Our screen included only companies whose most recent increase was for more than 10%. (For a great analysis of the highest yields, see David Van Knapp's article here.) So this month, I screened as follows:
Step1: Sort the companies by yield, focusing on those with a yield of at least 3%. That included 53 companies, which was cut to 45 by eliminating any that had not increased their payout in the past year.
Step 2: Sort those companies by most recent percentage increase. Eliminating those with increases of less than 4% cut the list down to 16 companies.
Step 3: Sort those companies by 5- and 10-year average percentage increases. Eliminating those with increases of less than 5%, cut the list to 14 companies, eliminating only American States Water (NYSE:AWR) and Northwest Natural Gas (NYSE:NWN), two companies whose streaks are among the longest, at 55 and 54 years, respectively.
Step 4: Sort those companies by the A/D (Acceleration/Deceleration) ratio, which divides the 5-year average percentage change by the 10-year average. Dropping those with an A/D ratio below 0.80 cut the list to nine companies.
Step 5: Compare the remaining companies by price/earnings ratio, according to Yahoo Finance. That list follows, with price, yield, P/E (as of June 30):
Air Products & Chemicals (NYSE:APD), $64.81, 3.02%, 16.26
Clorox Company (NYSE:CLX), $62.16, 3.54%, 14.63
Coca-Cola Company (NYSE:KO), $50.12, 3.51%, 16.48
ExxonMobil Corp. (NYSE:XOM), $57.07, 3.08%, 13.01
Kimberly-Clark (NYSE:KMB), $60.63, 4.35%, 13.61
Leggett & Platt (NYSE:LEG), $20.06, 5.18%, 20.66
McGraw-Hill Companies (MHP), $28.14, 3.34%, 11.48
PepsiCo Inc. (NYSE:PEP), $60.95, 3.15%, 15.49
Procter & Gamble (NYSE:PG), $59.98, 3.21%, 14.31
And the Winners are...
All nine of these companies have attractive properties, but selecting a smaller group will depend on the individual investor. Those with the highest P/E ratios (APD, KO, LEG) could be eliminated, as could the lowest yields (APD, XOM, PEP, PG). That would leave a “final three” of Clorox, Kimberly-Clark, and McGraw-Hill. These would certainly make an excellent starter portfolio (as would the full group of nine companies).
Since we began with the premise of high yield, the nod would have to go to Kimberly-Clark, at 4.35%. Its latest dividend increase was for 10%, just below its 5-year average of 10.91% and down slightly from its 10-year average of 13.11%. But even if its rate of increase were to slip to 7.2%, the payout would double in 10 years, according to the Rule of 72 (For an explanation of the Rule of 72, click here.) So, for a current purchase of KMB, an investor's yield on cost (y-o-c) would be about 8.7% in the year 2020. And if the increase rate stays close to 10%, that y-o-c would come in the year 2017. In either case, not a bad investment, and that doesn't include any capital appreciation in the intervening years.
Disclosure: Author owns KO, XOM, KMB, PEP, PG