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What's not to like in a portfolio that has current income (Dividend), capital gains (Growth) and future income stream (Dividend Growth)?
This analysis presents three stocks and how they stack up in each of the three characteristics; dividend, growth and dividend growth. They are so well known that we need not waste time writing about what they do to earn a living. So let's dive in.

Additional Note: Let us try making this an interactive series where we continue building this portfolio with input from the readers. As we get more names that meet these criteria, we shall publish more parts of this series.

Apple (NASDAQ:AAPL):

Current Yield: This is a slight cheat, as Apple will start paying a $2.65 dividend/quarter only from the fourth fiscal quarter of 2012. At the current trading range of $580 to $600, the yield works out to about 1.8%. Not a world beating yield but a starter nonetheless.

Growth Catalysts:

  • China - China has fast grown into Apple's second biggest market behind the United States. But there is still plenty of room to grow in China, as Apple tries to get more carriers support the iPhone especially.
  • New Products - Apple's key strength has been its innovation. Be it new products or refreshes of existing products, Apple's products sell like hot cakes in the U.S. and other parts of the world. With more growth projected for smartphones and tablets, Apple is in a good shape.

Dividend Growth Prospects:

  • Payout Ratio: The current payout ratio is about 30%, a very manageable level for any company and especially for an earnings juggernaut like Apple.
  • Balance Sheet: Apple's balance sheet is legendary these days. With no debt and close to $100 B in cash (Yes, in spite of the dividend and buyback, the cash equivalents will soon shoot up); one cannot find a better balance sheet.

Philip Morris (NYSE:PM):

Current Yield: Philip Morris' current yield is about 3.5% at the current PPS range of $85 to $87. That is slightly lower than the yield of some of the tobacco peers but is way above the market average.

Growth Catalysts:

  • International Presence: As noted in this article, PM operates in more than 150 countries and has a global market share of 15%. With strong brands like Marlboro, one can expect PM to grow its market share further.
  • Acquisitions: Philip Morris furthers its growth by acquiring stakes or whole companies. This is critical when expanding into new markets, as instead of beginning from scratch, PM can hit the ground running by changing the operations of an existing company the way it wants.

Dividend Growth Prospects:

  • Payout Ratio: One of the reasons PM's current yield is lower than that of its peers is the conservative (for tobacco stocks) payout ratio of about 60%. This definitely gives PM more freedom to increase its payouts inline with its earnings.
  • Dividend History: Even though PM has been an independent entity for only four years, one must not forget its Altria (NYSE:MO) roots. Altria has been a dividend champion for a long time and PM has already increased its dividend each of the last four years. Applying the average of the past four increases (14%), we might expect a new dividend of 88 cents per share coming our way from September 2012.

McDonald's (NYSE:MCD):

Current Yield: MCD's current yield is about 2.9%. The stock pulled back a bit from $100 to $96 after reporting lower than expected same-store sales in February.

Growth Catalysts:

  • International Expansion: Like PM and Apple, MCD also is a global brand. As noted in this article, MCD is almost a staple these days and not even the mess in Europe could slow it down. We personally know how much the developing countries (BRICs) want to mimic the western lifestyle. And McDonald's is a key part of the American tradition.
  • Target Audience: These days there are three types of consumers at any restaurant: the ones who eat for taste/comfort, the ones who eat for health, and the kids. McDonald's efforts to attract the first and third types are legendary. McDonald's has long been criticized for the health effect of its food. Not one to miss out on an opportunity, the company promptly introduced "healthy" options in its menu. What this shows is the company is ready to adjust itself to the latest demands out there.

Dividend Growth Prospects:

  • Payout Ratio: MCD, like PM and Apple has a low payout ratio as well, at 53%.
  • Dividend History: McDonald's has increased its dividend for the past three decades and more. Going by the last four-year average, we should be looking at a new dividend of at least 78 cents a share.

Disclosure: I am long AAPL, PM.

Source: A Diversified Dividend, Growth And Dividend Growth Portfolio