Mergent, a spin-off of Moody's Investor Services that was acquired in 2004 by a Chinese financial and media company Xinhua Finance, has been publishing historical information about "dividend achievers" since 1979. Since 2003, the company's indices have been the basis for a number of investment products from BlackRock, PowerShares, and Vanguard, including exchange-traded funds and mutual funds.
Mergent "Dividend Achievers" indices track companies that have raised dividends for at least 10 consecutive years. The companies making up the indices boast strong cash reserves, solid balance sheets, and a proven record of consistent earnings growth. All Dividend Achiever stocks have a two-month average daily trading volume in excess of $500,000. The broadest index, U.S. Broad Dividend Achievers Index, consists of some 201 dividend payers. The average yield of the index constituents is 2.94%. The index's EPS growth rate averaged 5.56% per year over the past five years, while its dividend growth rate averaged almost 9.0% per year.
Here is a closer look at seven index constituents with the largest shares in the index's value.
Chevron Corporation (CVX) is an integrated energy giant with a dividend yield of 3.2% and a payout ratio of 27%. Its peers Exxon Mobil (XOM) and ConocoPhillips (COP) yield 2.6% and 4.6%, respectively. Chevron's dividend growth averaged 9.2% per year over the past five years; it has accelerated to 11% this year. Over the past five years, the company's EPS grew at an average rate of 11.5%. The EPS growth is expected to average a much lower 1.6% per year for the next five years. The stock has a free cash flow yield of 2.4%, ROE of 22%, and return on invested capital [ROIC] of 19%. The company has a negligible debt relative to equity. The stock's P/E of 8.4 compares to the industry average ratio of 9.1 and the stock's five-year average P/E of 9.8. The stock is popular with Phill Gross (Adage Capital), who has almost $300 million invested in the company.
AT&T (T) is a leading U.S. telecommunications giant with the highest dividend yield in the Dow 30. The company's dividend yields 4.8% on a payout ratio of 72% of last year's free cash flow. Its main competitor Verizon Communications (VZ) yields 4.7%, while rival Sprint Nextel (S) does not pay dividends. Over the past five years, the company's EPS contracted at an average rate of nearly 19% per year, while its dividends grew at a rate of 4.6% per year. EPS growth is expected to accelerate to an average rate of 9.2% per year for the next half decade. The stock has a free cash flow yield of 2.7% and low ROE of 4% and ROIC of 2.8%. The stock is trading at a forward P/E of 10.1, which is lower than the company's historical metrics. Among fund managers, Phill Gross and Donald Chiboucis (Columbus Circle Investors-check out its top picks) are bullish about the stock.
Wal-Mart (WMT) is a discount retail giant that pays a dividend yield of 2.2% on a payout ratio of 34%. Its peers Costco Wholesale Corporation (COST) and Target Inc. (TGT) pay dividends yielding 1.1% and 2.2%, respectively. Over the past five years, Wal-Mart saw its EPS and dividends grow at average rates of 9.2% and 13.5% per year, respectively. The EPS growth is expected to average about the same for the next five years. The company boasts a free cash flow yield of 3.1%, ROE of 24%, and ROIC of 14.6%. The company's total debt-to-equity ratio is at 78%. The stock is trading at a P/E of 15.6, which compares with the industry ratio of 16.4 and the stock's five-year average of 14.8. Legendary investors Warren Buffett and George Soros are both great fans of the stock.
Procter & Gamble (PG) is a consumer goods giant with a dividend yield of 3.3% and a payout ratio of 61%. Its peers Kimberly-Clark Corporation (KMB) and Colgate-Palmolive (CL) pay dividend yields of 3.5% and 2.3%, respectively. P&G's EPS and dividends grew at average annual rates of 1.9% and 10.5%, respectively, over the past five years. Over the next five, the EPS growth is forecast to accelerate to 8.5% per year. The stock has a free cash flow yield of 1.7%, ROE of 17.5%, and ROIC of 13%. The shares are trading at a P/E of 21.6, compared with an industry P/E of 19.9 and the stock's five-year average ratio of 18.3. The stock is undervalued relative to its respective industry based on the price-to-book value ratio. Activist investor Bill Ackman is among the major holders of this stock.
Exxon Mobile Corporation (XOM) is another integrated oil and natural gas giant and the world's largest dividend payer. Its dividend yields 2.6% on a payout ratio of 24%. Its peers Chevron Corporation and ConocoPhillips yield higher dividend yields of 3.2% and 4.6%, respectively. Over the past five years, Exxon Mobil boosted its EPS and dividends at average rates of 5% and 9.2%, respectively. This year, the company hiked its dividend by a much higher 21%. The company's EPS growth is expected to average a higher 7.5% per year for the next five years. The stock boast a free cash flow yield of 3.3%, ROE of 28%, and ROIC of 23%. Its total debt-to-equity ratio is negligible. The stock is trading at a P/E of 9.2, compared with an industry average of 9.1 and the company's five-year average ratio of 12.2. Billionaires Cliff Asness and D. E. Shaw hold large stakes in the company.
International Business Machines (IBM) is a technology bellwether paying a dividend yield of 1.7% on a low payout ratio of 25%. Its rivals Microsoft (MSFT) and Hewlett-Packard Company (HPQ) pay dividend yields of 2.6% and 3.1%, respectively. Over the past five years, IBM saw its EPS and dividends grow at average rates of 16.6% and 18.0% per year, respectively. For the next five years, the company is forecast to boost its EPS at an average rate of 10.6% per year. IBM has a free cash flow yield of 5.4%. It boasts high ROE of 75% and ROIC of 36%. In terms of valuation, the stock is trading on par with its peer group on average. On a forward P/E basis, the stock is priced below the computer services industry. Warren Buffett's Berkshire Hathaway holds more than $13 billion in this stock or about 17.5% of its portfolio.
Coca-Cola Company (KO) is a global beverages company that pays a dividend yield of 2.7% on a payout ratio of 54%. Its peers PepsiCo (PEP) and Dr Pepper Snapple Group (DPS) have dividend yields of 3.0% each. Coca-Cola Company's EPS increased at an average rate of 11.3%, while its dividend rose at a rate of 8.6% per year. Analysts expect that the company's EPS growth will average a somewhat slower 7.5% per year for the next five years. The company has a free cash flow yield of 2.2%, ROE of 27%, and ROIC of 18%. This compares with ROE of 29.5% and ROIC of 14.4% for PepsiCo. The stock has a P/E of 19.8, compared with 19.4 for the industry on average. On a forward P/E basis, the stock is trading well below its five-year average P/E of 18.7. Warren Buffett's Berkshire Hathaway has more than $15.6 billion or 21% of its portfolio value invested in the company.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.