High dividend stocks are trading at historically high PE ratios. Utility stocks' forward PE ratios are around 13-14, whereas they have historically been around 10-12. That's why we turn our attention to dividend growth stocks. These stocks usually have dividend yields between 2% to 4%. Although they are not yielding as much as high dividend stocks with dividend yields above 5%, they still beat the 2% yielding 10-year Treasury bonds. Additionally, these companies usually have more room to increase their dividends at higher rates over a long period of time. Therefore, dividend growth stocks are attractive options for those investors who are willing to wait for higher dividend payouts in the future.
In this article, we are going to discuss in detail two large-cap US basic material dividend growth stocks: ConocoPhillips (COP) and E. I. du Pont de Nemours and Company (DD). Both companies have over $10 billion market cap, and at least a 3% dividend yield. They also have payout ratios of below 50%. Moreover, their current P/E ratios and forward P/E ratios are below 15. The low multiples and low payout ratios indicate that they may be able to increase their dividend payouts in the next few years.
ConocoPhillips: COP is an energy company. Its current dividend yield is 3.48%. We think such decent dividend is sustainable and is very likely to be raised in the next couple of years. In fact, COP has a good track record of increasing its dividends. For the past 11 years, the company has been increasing its dividend payouts every year. Recently, the company announced that it would raise its quarterly dividends from $0.55 per share to $0.66 per share, which will be paid to its shareholders at the beginning of March. We expect the company will continue to increase its dividends because it has strong earnings growth. For the fourth quarter last year, COP reported net income of $3.4 billion on $62.4 billion total revenue, compared with $2.0 billion net income on $53.2 billion total revenue for the same period a year earlier. According to Zacks, COP's earnings are expected to grow at over 7% per year. Moreover, COP has a low payout ratio of 29.43%, indicating that it is able to continue raising its dividend even though its earnings do not grow as much as expected. COP also seems to be trading at a discount compared with its peers. Its current P/E ratio is 8.46, versus 23 for the average of its peers. Its forward P/E ratio of 8.68 is also lower than 12.50 for its peers.
The main competitor of COP, Chevron Corporation (CVX), also has a low P/E ratio of 8.12 and a decent dividend yield of 2.97%. The company also seems to be able to increase its dividend payouts in the next couple of years. It has a low payout ratio of 24.11%, and its earnings are expected to grow at about 7.5% annually. It also has an impressive track record of continuously raising its dividends for 24 consecutive years. Billionaire Warren Buffett prefers COP over CVX though. As of December 31, 2011, his Berkshire Hathaway still had over $2 billion invested in this position. Buffett also has a small Exxon Mobil (XOM) position. We like both COP and CVX. Though CVX has a lower dividend yield, it beats COP on payout ratio, dividend growth history, and earnings growth expectations.
E. I. du Pont de Nemours and Company: DD is a chemical company. It has a dividend yield of 3.22%. Its current quarterly dividend is $0.41 per share, versus $0.35 per share in 2000. The dividend growth rate seems very small since 2000, even lower than the inflation rate during the same period. The company once increased its quarterly dividend to $0.46 per share in February 2003, but the dividend dropped back to $0.35 per share in the following quarter. Overall, DD's dividend payout has a growing trend over the past decade, but we do not think the growth is strong enough. The company's fourth-quarter 2011 earnings result is also not as good as a year ago. It reported net income of $373 million, versus $376 million for the same quarter in 2010. Despite that, analysts still estimate its earnings to grow at nearly 9% per year in the next couple of years. DD's payout ratio for the past 12 months is about 45%, which means that the company has the ability to increase its dividends. In the future, we think DD will at least increase its dividend payouts gradually. It may not be a perfect choice for investors who look for strong dividend growth, but it is still a better investment than long-term Treasury bonds.
With regard to valuation, DD has a low P/E ratio of 13.86, versus 18.35 for the average of its peers. For example, the main competitor of DD, The Dow Chemical Company (DOW), has a P/E ratio of 16.58. However, DD's forward P/E ratio is slightly higher than that of DOW. DD has a forward P/E ratio of 10.6, compared with 9.89 for DOW. DOW also has a decent dividend yield of 2.96% and a low payout ratio of 44%. However, we do not like DOW's dividend history. It significantly cut its quarterly dividend from $0.42 per share to only $0.15 per share in early 2009. Now its quarterly dividend is $0.25 per share. We think DD is a more dependable stock to invest in than DOW.