The Clorox Co (CLX), Mattel, Inc. (MAT), Lockheed Martin Corporation (LMT): Completing The Ultimate Dividend Growth Portfolio

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When you’re building a dividend growth portfolio it’s a good idea to hold a relatively diverse set of stocks. You don’t need to get too crazy with diversification, but having half of your portfolio in oil stocks is probably not a great idea. As I’ve built my Ultimate Dividend Growth Portfolio I’ve attempted to spread out investments across the different sectors, and today I’ll use the remaining cash to add three final positions. I’ve already got three banks, two oil stocks, a cigarette stock, a bunch of tech, some food-related stocks, and a drug store, so I’ll try to avoid these areas with the new additions.

Leading brands and a leading dividend

The Clorox Co (NYSE:CLX) may be best known for its namesake bleach, but the company owns a handful of other popular brands as well. Glad trash bags, Brita water-filtration products, Kingsford charcoal, Fresh Step cat litter, and Burt’s Bees are just a few. And according to the company’s website nearly 90% of its brands holds the number 1 or number 2 market share positions in their categories. This focus on a small number of leading brands instead of a smorgasbord of mediocre brands is what makes The Clorox Co (NYSE:CLX) special.

The Clorox Co (NYSE:CLX) currently pays a dividend yielding 2.98%. Since 2003 the dividend has grown at an annualized rate of 11.8%, although this has slowed down a bit in recent years. The last dividend hike, which occurred in the middle of last year, was only an increase of 6.67%.

In addition to this dividend The Clorox Co (NYSE:CLX) has spent quite a bit of cash on share buybacks over the past decade. The share count has decreased by 40% since 2003, and this is largely the reason that EPS has nearly doubled in that time. Share buybacks allow the dividend to be raised without increasing the payout ratio, since the number of shares declines. So if the company buys back 5% of the outstanding shares then the dividend could be raised by 5% while keeping the payout ratio the same.

The Clorox Co (NYSE:CLX) has maintained a very consistent free cash flow over the years, which will allow the company to continue buying back shares and raising the dividend. In fiscal 2012 the payout ratio with respect to net income was 58.7%, historically high for the company. This could lead to slower dividend growth in the near-term, but long term I think that the dividend growth prospects look good.

Based of the current share price I’ll add 58 shares of The Clorox Co (NYSE:CLX) to The Ultimate Dividend Growth Portfolio for a total cost basis of $4,985.68. This position will generate a projected annual dividend of $148.48.

A toy giant with a giant dividend

Mattel, Inc. (NASDAQ:MAT) is the largest company in the toy industry, with revenue of about $6.4 billion in 2012. Some of the best known toy brands like Matchbox, Hot Wheels, and Barbie are under the Mattel umbrella, and the company’s margins are exceptional. With an operating margin of 16% in 2012 the company outpaces competitor Hasbro by about 2.5 percentage points.

Mattel, Inc. (NASDAQ:MAT) pays a dividend yielding 3.11%. The dividend has more than tripled since 2003, growing at an annualized rate of 13.4%. The most recent dividend increase occured earlier this year when the payout was hiked by 16.1%. If this kind of growth can continue then Mattel, Inc. (NASDAQ:MAT) looks like an ideal dividend growth stock.

The payout ratio did jump a bit to 55.9% in 2012, and the increase earlier this year puts it even higher. The company recorded higher net income in the first quarter of this year compared to last year as well as a 7.3% jump in revenue, so if the net income grows considerably this year then the payout ratio will be kept in check. And with analysts expected annual earnings growth of 11% over the next five years the dividend should be able to be boosted by roughly that amount.

Mattel, Inc. (NASDAQ:MAT) should see considerable growth from emerging markets as more and more people have disposable income to spend on their children. This will be the main driver of earnings growth and therefore dividend growth in the years ahead.

Based on the current share price I’ll add 108 shares of Mattel, Inc. (NASDAQ:MAT) to The Ultimate Dividend Growth Portfolio for a total cost basis of $4,996.08. This position will generate a projected annual dividend of $155.52.

High yield, high uncertainty

Adding a defense company seems risky due to the expectation of lower government spending in the coming years, but Lockheed Martin Corporation (NYSE:LMT) looks like a compelling choice. The dividend yield is currently 4.52%, meaning that dividend growth does not need to be all that fast.

Historically Lockheed Martin Corporation (NYSE:LMT) has grown the dividend rather quickly. Since 2003 the dividend has grown at an annualized rate of 24.4%, and the most recent dividend hike was an impressive 15%. But with the payout ratio right around 50% and the likelihood of earnings declines very real it seems like this kind of growth can’t continue.

The good news is that the company has been buying back shares and could retire around 5% of its share count annually even after paying the dividend. This allows the dividend to be increased by about that much each year without raising the payout ratio, so even if earnings growth stops the dividend could still be raised.

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