According to the financial website InvestorPlace, 50 blue-chip companies raised their dividends during the second quarter of 2013. This despite stock market declines, which were reportedly because of the Federal Reserve’s hints that it may begin easing back on stimulus by as early as September.
Investors are still flocking to dividend companies, even though bond interest rates are starting to increase. Dividend companies can offer a steady income stream along with the potential for share-price increases, but you have to choose your dividend payers carefully.
If you’ve read any of my articles, you know that I am a huge dividend fan. I’ve been writing about dividend-paying companies for about a year, I’ve designed a ratings system to help me select the best companies, and I’ve built my Perfect Dividend Portfolio (PDP), featuring 10 stocks that I believe will perform better than other dividend portfolios.
I look for a combination of an excellent dividend-raising history, high current yield, and superior potential for earnings growth. Earnings are important, and I take into account the projected five-year earnings growth rate as well as the current PE and share-price increase over the past 12-month period.
For this article, I examine the 50 companies listed in an Investor Place article, and pull out the four that I believe represent the best opportunities today in order of how they score on my ratings system. One company is already in my PDP and one I reviewed recently; I looked at the third several months ago, and I have never even examined the fourth.
Darden Restaurants hit the spot
Darden Restaurants, Inc. (NYSE:DRI) is the casual-dining chain that includes Olive Garden, Red Lobster, Longhorn steakhouses, Bahama Breeze, and the Capital Grill.
The stock was recently hovering at $51 per share and yields 4.4%. The company has raised its dividend every year for eight years, which is lower than my requirement of 10 years; the last increase was declared on June 20 for payment in August, an increase of 10%. The company has an astonishing five-year dividend growth rate (DGR) of 25%, and a payout ratio of 63%.
Despite reporting increased revenue, Darden Restaurants, Inc. (NYSE:DRI) recently missed hitting its FY 4Q earnings estimate, and both gross and net margins fell from the prior quarter. The company has had to reduce prices and resort to more promotional offerings in order to keep traffic up, which has hit the bottom line. The stock took a hit, too, dropping by nearly 10%.
The payout ratio is on the high side, so any further hits to earnings may translate to consequences for the dividend. Darden Restaurants, Inc. (NYSE:DRI)’s 4% dividend is tempting, but keep an eye on revenue and earnings for the near future.
Clorox is boring but reliable
The Clorox Company (NYSE:CLX) is currently trading at $83 and yields 3.4%; the company has been raising dividends consistently for 36 years, and has a five-year DGR of 12.2%. Its five-year projected earnings growth rate is 7.2%, and its PE is 19.5.
The Clorox Company (NYSE:CLX) most recently raised its dividend by 11% in May, after reporting slightly negative numbers for FY 3Q. Clorox has returned 20% over the past 12 months, and its stable of dependable-but-boring cleaning brands provide a solid foundation for paying dividends well into the future.
However, while The Clorox Company (NYSE:CLX) doesn’t seem in any immediate danger of being unable to pay its dividend, the stock price itself may offer risk. The trailing-12 month PE at 19.5 is running quite high against the company’s historical PE, and the PEG ratio of 2.7 indicates that the share price may have gotten quite a bit ahead of its historical growth measurements.