I’ve been analyzing dividend stocks for a year now, and have examined hundreds of companies and written nearly a hundred articles on the subject, all the while searching for companies for my Perfect Dividend Portfolio, which has not proven as easy as I initially thought it would be.
So naturally, when I see a definitive list like the one from Mr. Caplinger, I’m compelled to examine his recommendations using my own criteria and ratings system. I also use Dividend Growth as one of my key factors. However, I am a little less strict on my timeline, as I look at companies that have at least ten years of consistently raising dividends.
When I conduct my analysis, I review the companies on seven different criteria: yield, number of years paying and raising dividends, five-year Dividend Growth Rate (DGR), five-year projected Earnings Growth Rate (EGR), total return for the past twelve months, P/E ratio, and payout ratio. I feel that this selection covers the past dividend-paying history, the potential future earnings growth, and the valuation of the company.
I constructed a rating system that awards points for each of the aforementioned criteria. A “perfect” score would be 28 points, with 4 points awarded in all seven categories.
I’ve chosen ten companies for my Perfect Dividend Portfolio, and not one of them is on Mr. Caplinger’s list of must-have stocks. You can get access to his full report at the end of the post.
The first company on his list is The Coca-Cola Company (NYSE:KO). The company is currently trading at around $42 and yields 2.7%. It has raised dividends every year for 50 years, its five-year DGR is 8.4%, and it has returned 15.1% over the past twelve months.
Other metrics that I use when calculating a rating for a dividend company include analysts’ five-year annual growth estimate (9%), the company’s PE (22.1), and its dividend-payout ratio (55%).
The Coca-Cola Company (NYSE:KO) scores a 15 on my ratings system, which is too low to make it into my portfolio. I like pretty much everything about the company, except for its yield being below 3%. However, there are companies with better metrics, that score 18 or more on my ratings scale, and they are already in my portfolio.
The second company is 3M Co (NYSE:MMM). Yes, the people who make the sticky notes. The company is currently trading at approximately $105 per share and yields 2.4%. It has raised dividends every year for 54 years, its 5-year DGR is 4.4%, and it has returned 19.9% over the past twelve months.
Analysts’ five-year annual growth estimate is 9.8%, the company’s PE is 16.5, and its dividend-payout ratio is 38%.
3M Co (NYSE:MMM) also scored a 15 on my ratings system. I like to see a DGR closer to 10%, and the yield is too low for my serious consideration
The third company on the list is The Procter & Gamble Company (NYSE:PG), which is currently trading at $76, and has raised dividends for an astonishing 59 years, with a 9.6% DGR. The company has returned 24% over the past twelve months.
Analysts’ five-year annual growth estimate is 7.8%, the company’s PE is 17.3, and its dividend-payout ratio is 51%.
The Procter & Gamble Company (NYSE:PG) actually looks pretty good to me right now, scoring an 18 on my scale. However, the yield at 3.1% is just barely sufficient for my portfolio, and the yield is actually a bit elevated due to a recent sharp price decline after the company reported disappointing Q1 results.
I’ve created a chart to show how each company scores for each factor.
| Company | Years | Yield | DGR | EGR | Payout | Total Return | PE | TOTAL |
|---|---|---|---|---|---|---|---|---|
| Coca-Cola | 4 | 1 | 2 | 2 | 2 | 3 | 1 | 15 |
| 3M | 4 | 0 | 0 | 2 | 4 | 3 | 2 | 15 |
| P&G | 4 | 2 | 2 | 2 | 2 | 4 | 2 | 18 |
If I were still looking to add companies to my portfolio, I would seriously be considering The Procter & Gamble Company (NYSE:PG). It’s a solid, reliable company that can be relied upon for consistent dividend increases and, most likely, pretty steady price appreciation.
You probably won’t be disappointed if you add any of these three companies to your dividend portfolio. However, I’ve found ten other companies that I think are better, and they may or may not appeal to you as dividend payers. You can be the judge.
The article Do Dividend Investors Need These 3 Dow Stocks? originally appeared on Fool.com and is written by Karin Hernandez.
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