Plain Dividend Yield is For Chumps -- We Screen the Aristocrats for Dividend Growth: 10 Income Winners

Having survived the fiscal cliff scare, the dividend juggernaut is primed to continue on its merry way in 2013. The tax rate on dividend income will remain at 15% for households making less than $450,000; even the wealthy will be hit with just a 20% tax levy, not exactly painful when measured against a top income tax rate of 39.6%.

Meanwhile, Howard Silverblatt, the dividend maven at S&P Dow Jones Indices is on the record expecting 2013 dividend payouts to top 2012’s record haul: Among the 402 stocks in the S&P 500 that pay a dividend, total payouts reached $281.5 billion, a 17% rise from 2011.

Thing is, the dividend landscape has become a tad picked-over in the past year or so as Ben Bernanke’s choke-hold on bond yields continues to push income investors from bonds and into the common stock dividend playing field. Treasuries yield less than 2%. High grade corporate issues maturing in five years or so aren’t paying much more than that. Meanwhile, plenty of blue chip stocks have yields north of 2.5%. The challenge for income seekers is to find solid dividend payers that aren’t trading at pricey valuations.

With that in mind, we set our sights on the S&P 500 Dividend Aristocrats, companies in the S&P 500 that have managed annual dividend increases for at least 25 straight years. That’s a nice track record, but there’s wide variance among the 51 Aristocrats in terms of how big those dividend increases are. For example, Consolidated Edison (ED) is an aristocrat with a juicy looking 4.3% dividend yield. But the dividend increase for the past 12 months was less than 1%, and over the past five years, shareholders’ dividend boost has lagged inflation.

ED Dividend Chart

ED Dividend data by YCharts

Dividend growth that outpaces inflation is a smart way to vet dividend-payers. There’s no getting around the fact that stocks are more volatile than bonds. Focusing on stocks with strong dividend growth provides some nice recompense that most bonds can’t deliver. After all, unless you’re trawling in the junk pile of rising-rate bank loan debt, all bond income is fixed.

Another issue to keep an eye out for is the consistency of dividend growth. Among the S&P Dividend Aristocrats, Nucor’s (NUE) 5-year annualized dividend growth rate of nearly 25% seems great. But it’s three and one-year growth rates are sub-inflation.

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 (LOW)

In an ongoing series, we will dive down into each of the 10 stocks to evaluate how healthy the dividend picture looks going forward, and whether the current price of the stock is a decent entry point.

Clorox is #10 on the list, with five-year annualized dividend growth of 15%, nearly double the rate of inflation. The current dividend yield is 3.4%, and thanks to a consistently growing income stream, the consumer products firm -- Pine Sol, Glad trash bags as well as the ubiquitous bleach -- has a total return (price change + dividend income) that surpasses the S&P 500 index, as seen in a stock chart.

CLX Total Return Price Chart

CLX Total Return Price data by YCharts

That’s impressive, but a word of caution. Lately, Clorox’s payout ratio (the percentage of earnings eaten up by the dividend) and the cash payout ratio (how much of available cash would be needed to cover the dividend) have risen sharply. Generally, for non-utilities, a payout ratio below 50% is the sort of breathing room that makes it more likely strong dividend growth can continue.

CLX Payout Ratio TTM Chart

CLX Payout Ratio TTM data by YCharts

Clorox has been hard-pressed for top-line growth. Over the past five years, revenue has grown just 7%, less than half the growth in the five years prior. (I am referring to 2002-2007) That said, putting the squeeze on costs and efficiency, Clorox has been able to increase its profit margin over the past five years, distancing itself from the declining margins of competitors Procter & Gamble (PG) and Kimberly Clark (KMB).

CLX Profit Margin TTM Chart

CLX Profit Margin TTM data by YCharts

Clorox’s stock appreciation seems indicative of a reliable dividend grower that has been bid up in these income-starved times. Its current 18 PE ratio is well above the market average of 14%. And with those high payout ratios it’s not clear how long Clorox can continue large dividend growth without a meaningful tick in top-line growth.

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.

Read more articles about: Investing Ideas  

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