As a dividend growth investor I am constantly looking for new ideas or themes to invest in. Often, we are blinded by the numerous headlines about the day's trendiest stock and get lost in a sea of information.
Well, I for one think that finding great investment themes doesn't have to be difficult. In fact, it can be downright easy. As you may know, I am a big fan of the consumer staples sector and have a considerable amount of my portfolio invested in that space. I am also a firm believer in the defensive nature of the consumer staples sector and realize that when times are good or bad, people simply cannot go without these staples. And so… I bring to you my investing ideas from my bathroom.
When deciding on what to buy for your dividend growth portfolio you need look no further than your own bathroom. Go ahead, open up that medicine cabinet or drawer and see what products are there. Chances are that in any economy those same products are always there. Think about it… we all brush our teeth, use soap and shampoo in the shower, have some prescription medicine and other first aid products, shave and of course everyone uses the toilet. So what products are in your bathroom?
First up, one of the classic dividend growth stocks found in many portfolios is Johnson & Johnson (NYSE:JNJ). This health care company needs no introduction as we are all familiar with many of their brands. JNJ operates in three distinct segments: Consumer, Pharmaceutical, and Medical Devices and Diagnostics. Some of their top brands include Tylenol, Band-Aid, Listerine, Visine, o.b. Tampon, Neutrogena and many, many other famous brands.
JNJ currently yields 2.80% with a reasonable PE for the day at 19.18. What makes JNJ really special, as a dividend growth investor, is the fact the company has paid a growing dividend for over 50 years and since 1970 that dividend has grown at a 13.97% annualized rate. Yes, this has been and continues to be a great stock to own.
Next up in our bathroom adventure is The Procter & Gamble Company (NYSE:PG). Here is another company that needs no introduction and has products that can be found in pretty much every bathroom in the world. Some of those products include, Head & Shoulders, Olay, Pantene, Gillette, Crest, Oral-B, among many more.
PG is another stalwart among dividend growth investors. PG currently offers a very generous yield of 3.20% which is pretty high among its peers. Its PE may be a little rich for the day at 21.39, but still offers some value even at these prices. PG has a dividend growth history that goes back almost 60 years and has a fair payout ratio of 61.3% which is safe and assures us of future dividend raises going forward. Since 1970, PG had an annualized dividend growth rate of just under 10.00%. As you can see, both JNJ and PG have had a very high annual dividend growth rate spanning multiple decades. This is what you want to look for when constructing a dividend growth portfolio.
Staying near the sink in our bathroom we can find Colgate-Palmolive Co. (NYSE:CL), another company that needs no introduction. Along with its namesake toothpaste, CL also produces Speed Stick, Softsoap, Irish Spring and much more. CL currently offers a decent yield of 2.20% with a relatively low payout ratio of about 48.3%.
The PE of CL is on the high end of the spectrum these days at 28.66. You might want to wait on pulling the trigger on this one at these levels. CL also has a very long dividend history spanning over 50 years with a very respectable annualized growth rate of 9.16%. Not too shabby.
We all need to keep our bathroom clean and sparkle fresh, right? So why not use some Clorox Company (NYSE:CLX) products to get that just cleaned smell. Along with its namesake bleach products, CLX also produces Formula 409, Pine-Sol, Tilex and for those occasional drain clogs-- Liquid-Plumr. Just imagine how many homes worldwide are using these products.
Now I know current shareholders of CLX were not too thrilled with CLX's recent dividend increase, but nonetheless it was an increase and CLX also has a very long and rich dividend growth history going back almost four decades. In fact, going back about 30 years the annualized dividend growth rate is a very respectable 12.43%. The current yield for CLX is a hefty 3.30% with a slightly higher payout ratio than its peers at 68.2%. The PE for CLX is 20.53 which makes it fairly valued in today's high valuation market.
Our final pit stop on this bathroom trek is with Kimberly-Clark Corporation (NYSE:KMB). Of course, as we all know every bathroom must be equipped with paper products and KMB delivers with such brands as Kleenex, Scott, Cottonelle, Kotex, among many others. KMB currently sports a very healthy 3.00% yield with a modest PE of 19.63 which is a bit high compared to its 5 year average of 16.9 but lower than its peers at 22.1. So I guess KMB with its generous yield might be at fair value in today's high valuation market. KMB has been raising its dividend for over 40 years and for the last 30 years had an average annualized growth rate of 8.81%. Again, not too shabby.
Clearly all the stocks mentioned here offer a very high and long-term annualized growth rate of their dividend, which is something you want to look for when following a dividend growth strategy. It's not so much about current yield as about long-term dividend growth rates. Any time you have a stock growing a dividend around 10% every year for a few decades, it makes your dividend income rise much faster.
If you are just starting out I highly recommend you view the everyday products you use in your bathroom. There are, of course, many other companies that can be found in your bathroom. I just wanted to focus on some of my consumer staple core holdings.
As you can see, constructing a dividend growth portfolio doesn't have to be difficult. Even if you start with the names mentioned here, you would have started out with a very solid dividend portfolio, albeit heavy in one sector. But that's OK too, since it is a very defensive sector. Of course, entry points matter when building out your portfolio so please pay attention to valuations, PEs, cash flow and recent dividend data such as payout ratios, etc.
Do you hold any bathroom stocks in your portfolio? Let me know.
Disclosure: Long JNJ, PG, CL, CLX, KMB