Now that the fiscal cliff has been averted, pretty much, and the tax rate on dividends has escaped being raised to the level of regular income taxes, it seems that the category of dividend-paying stocks is poised to continue its phenomenal popularity and growth in 2013.
A contributor on Y-Charts has recently begun a series of articles, whose title I love, decrying “plain dividend yield” in favor of examining a company’s dividend growth rate, or DGR. She is also only including Dividend Aristocrats, those companies that have been paying and raising their dividends for at least 25 years. I agree 100%. But I think that those three criteria alone are not nearly sufficient to ensure that you are buying the best of the best among dividend-paying companies.
I use a 7-criteria rating system and assign each of the seven categories a point value from 1 (lowest) to 4 (highest). The perfect score would be a 28, but I have never yet seen a company that rates above a 20. So far the companies that I have chosen for my portfolio rate in the 18-20 point range. A company which scores 16-17 points stays on my list for further scrutiny, but anything that scores 15 or lower is relegated to my rejection pile.
The number one company on Y-Charts’ list is Lowe’s (NYSE:LOW) Companies . The home improvement giant is currently trading at $36 per share and yields 1.8%. The company has been paying and raising dividends consistently for 51 years, and its DGR is 18.4%. Its PE is 21.5, and its twelve-month total return is 38.9%. The payout ratio is a sustainable 36%, so the dividend appears secure (if low). The company is currently trading just off its 52-week high of $36.47 and is up 30% from last year.
The 27 analysts who cover the company rate the stock a 2.3 (1.0 = Strong Buy, 5.0 = Sell). It has six Strong Buys, eight Buys, 12 Holds, and one Underperform. They have set a one-year target (NYSE:TGT) price on the company of $36.84, which implies very little growth. Within the Motley Fool community, LOW is a three-star CAPS pick, with 2,144 Bulls and 292 Bears (88% positive sentiment).
Lowe’s scores a 20 on my ratings system, which would be high enough for it to be automatically added to my Dividend Portfolio. However, the dividend at 1.8% is far too low. While the dividend has been appreciating significantly, so has the price of the stock, so there has not been a rise in yield. While I appreciate the recent growth of this company, I think my money is better employed in a company with a similar dividend metrics profile and a higher yield.
The next company on the list is Walgreen (NYSE:WAG) . The company is trading at $40 per share and yields 2.5%. It has been paying and raising dividends for 37 years and has a 5-year DGR of 23.8%. The PE is 17.8, and the twelve-month total return is 24.4%. The payout ratio is a sustainable 48%. The company is currently trading at its 52-week high and is up 17% from last year.
The 25 analysts who cover the company rate the stock a 2.5 with four Strong Buys, six Buys, 12 Holds, two Underperforms, and one Sell. They have set a one-year target price on the company of $40.58, which is a potential gain of 4%. The Motley Fool community rates WAG only a three-star CAPS pick, with 2,099 Bulls and 141 Bears (94% positive sentiment).
Walgreen also scores a 20 on my ratings system. At a 2.5% yield, it might make it onto my list with another good dividend increase or a slight price decline. I note that the 5-year average dividend yield for the company is 1.9%, which means that the current dividend is higher than usual. If it rises just a bit more, I might be adding Walgreens to my Dividend Portfolio soon.
Next up is McDonald’s (NYSE:MCD) , which is currently trading at $91 per share and yields 3.4%. The company has been paying and raising dividends for 36 years, with a 5-year DGR of 14%. The PE is 17.2, and the twelve-month total return is a loss of 5.9%. The payout ratio is reasonable at 54%. The company is currently trading at 11% less than its 52-week high of $102, reached a year ago.
The 29 analysts who cover the company rate the stock a 2.3 with five Strong Buys, 11 Buys, 12 Holds, and one Underperform. They have set a one-year target price on the company of $97.38, which is a potential gain of 7%. The Motley Fool community rates MCD a five-star CAPS pick, with 5,922 Bulls and 295 Bears (95% positive sentiment).
McDonald’s scores a 16 on my ratings system, which is just a bit too low to qualify for my Dividend Portfolio.
The next company on the list is Target . The company is currently trading at $61 per share and yields 2.4%. The company has been paying and raising dividends for 41 years, with a 5-year DGR of 21.7%. Target’s PE is 13.6, and its twelve-month total return is 26%. The payout ratio is only 29%. The company is currently trading at 7% less than its 52-week high, which was hit in September, and is up 23% from last year.
The 23 professional analysts who cover the company rate the stock a 2.2 with four Strong Buys, 10 Buys, eight Holds, and one Underperform. They have set a one-year target price on the company of $70.06, which is a potential gain of 15%. The Motley Fool community rates TGT a four-star CAPS pick, with 2,419 Bulls and 234 Bears (91% positive sentiment).
Again, Target scores very high on my ratings system, but its dividend yield is just too low for me. I will put it on my list to watch for dividend hikes.
The fifth company on the Y-Charts list is W.W. Grainger . The company is currently trading at $208 per share and yields 1.5%. It has been paying and raising dividends for 41 years, with a 5-year DGR of 18%. Its PE is 22.2, and its twelve-month total return is 7.3%. The payout ratio is 33%. The company is currently trading at 6% less than its 52-week high, reached in April, and is up 4% from last year.
The 17 analysts who cover the company rate the stock a 2.3 with five Strong Buys, three Buys, eight Holds, and one Sell. They have set a one-year target price on the company of $221.57, which is a potential gain of 6%. The Motley Fool community rates GWW a four-star CAPS pick, with 225 Bulls and 14 Bears (94% positive sentiment).
Grainger scores an 18 on my ratings system, which again would ordinarily be within my range for automatic approval. However, once again its low yield is the single factor keeping it out of my portfolio. I don’t imagine, however, that any amount of dividend hike or price drop will be enough to raise it to 3% to meet my threshold.
I have found this evaluation of the Y-Charts list to be a valuable exercise, as many of these are companies that I have not already examined, and I will cover the next five companies on their list in a separate article.
In conclusion, while I would not add any of these companies to my own Dividend Portfolio at this point, I will definitely keep Walgreen and Target on my screening list, and watch for them to either hike their dividends or for their price to drop enough to bring them into the 3% yield range.
The article 5 High-DGR Dividend Stocks: “Plain Dividend Yield Is for Chumps” originally appeared on Fool.com.
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