Plain Dividend Yield’s For Chumps: Which Company, Among Payout Champs, Ranks No. 1?

Over the past five years, home-improvement retailer Lowe’s Companies (LOW) has increased its dividend at a 24.1% annualized pace, making it the strongest dividend booster among the S&P Dividend Aristocrats-companies in the S&P 500 that have delivered annual dividend increases for at least 25 consecutive years.

We’ve identified the 10 Dividend Aristocrats with the best dividend growth over the past five years, that also have inflation-besting dividend hikes over the past year and three years.

#10: Clorox (CLX)

#9: T. Rowe Price (TROW)

#8: Wal-Mart (WMT)

#7: Medtronic (MDT)

#6: Aflac (AFL)

#5: W.W. Grainger (GWW)

#4: Target (TGT)

#3: McDonald’s (MCD)

#2 Walgreens (WAG)

#1 Lowes

There’s plenty of breathing room for Lowe’s to continue dividend increases; its standard payout ratio is 35% and the cash-dividend payout ratio is below 30%. But Lowe’s is not going to satisfy investors looking for current income; its current 1.8% dividend yield is lower than the average 2% yield for the S&P 500.

The low yield is a function of a massive price rebound in 2012. Lowe’s stock price gain of 36% was more than double the rise for the S&P 500 index. Problem is, the stock’s valuation rose in lockstep.

LOW Chart

LOW data by YCharts

With a current PE ratio nearly 50% higher than the market average, Lowe’s isn’t exactly a screaming value play. The time to invest in Lowe’s and its main competitor Home Depot (HD) was about 18 months ago when betting on a housing recovery was still considered sticking your neck out. Back in mid July 2011 Lowe’s PE was below 15 and Home Depot just under 16 (it is now 22.5).

LOW Chart

LOW data by YCharts

The boost clearly wasn’t from a sharp pick up in sales. Lowe’s expects comp store sales to inch up just 1% or so when its fiscal 2012 year closes at the end of this month. What’s got the street’s attention was a nice uptick in profits.

LOW Revenue TTM Chart

LOW Revenue TTM data by YCharts

That said, revenue in 2013 might get some help from increased consumer spending on home projects. Whether incremental gains from rising home sale activity -- gotta gussy up the house before putting it on the market -- or the fact that stabilizing home prices make more homeowners likely to embark on renovation projects, there’s significant consumer demand. Harvard’s Joint Center for Housing Studies forecasts spending on home remodeling activity. For the 12 months through the end of Q1 it expects a 10.6% increase in home remodeling activity. For the 12 months through September the forecasted gain is 19.7% to $145.5 billion. That would be on par with the pre-bust high of $146 billion spent in the 12 months through June 2007. (Though still lagging after inflation.)

Whether to invest at this juncture comes down to your spin on current valuation. While the PE ratio has ratcheted up the past year, both the PEG ratio (price/earnings growth) and the price-to-sales ratio are no higher than they were during the recession. Lowe’s currently sells at 2.9x book value, compared to 5.4x for Home Depot. If that PE ratio gives you pause, Lowe’s is one dividend Aristocrat to keep on a watchlist to consider buying when its valuation gets hammered back down to a better entry-point.

Carla Fried, a senior contributing editor at ycharts.com, has covered investing for more than 25 years. Her work appears in The New York Times, Bloomberg.com and Money Magazine. She can be reached at editor@ycharts.com.

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