Based upon my experience, I chose a few criteria that I consider important when selecting dividend-growth stocks that keep up with inflation over the long term (and don’t keep you up at night). These criteria include:
1. Moderate yield (3% to 3.5%)
2. Dividend increases every year for a long period of time (25 years is a good timeline to use.)
3. Market cap of over $100 billion (a company that size will not easily fail.)
4. Companies from the consumer-products (except tobacco) sector and the oil/gas industry (since I am familiar with them)
A screener I used spit out three stocks (one of which I already own). Several other companies fell just short in one or more of the categories. They can be considered at another time.
I discuss each of the three candidates in detail below and go beyond the screening criteria to make the case to buy the stock or not based upon the dividend and other fundamentals.
Not a close shave
The consumer-products titan The Procter & Gamble Company (NYSE:PG) is currently in my portfolio. The owner of brands like Crest, Pampers, Tide and Gillette, all items that people need regularly, rakes in the cash, which allows it to pay a dividend of $2.41 per share per year. The dividend has been increased every year since 1956 and grown at a 9% compounded annual rate since 2008. The current yield is just over 3%.
The Procter & Gamble Company (NYSE:PG) has all of the ingredients in place to keep the dividend rising:
1. Payout ratio of 50% leaving some space to grow the payments;
2. Modest debt (32% long-term debt-to-equity ratio);
3. Improved growth outlook after a management shakeup that brought back former CEO A.G. Lafley;
4. Plenty of free cash flow ($3.2 billion)
Maker of Huggies on the right path
Another consumer-products company that has been a dividend stalwart for over 25 years is Kimberly Clark Corp (NYSE:KMB). It has increased the dividend, currently at $3.24 a share, by 6% per year over the last half decade. The yield is around 3.3%.
Can the company keep it up?
Let’s take a look:
1. Slightly elevated payout ratio (66%) but still a little room for expansion;
2. A high long-term debt-to-equity ratio of 97%, so it might have difficulty in the future increasing the dividend unless some debt is paid down;
3. Earnings have been increasing recently but total growth has been relatively flat over the last five years (this may need to be watched for a bit to see if the trend continues.)
4. Free cash flow ($1 billion) is increasing after a two-year lull.
So it looks like except for the debt, the company is on the right path for dividend growth.
Cash gusher
The oil and gas giant Chevron Corporation (NYSE:CVX) makes the list. It has a yield of 3.3% right now and has been growing the dividend every year since 1988. The current payout is $4 per share per year.
The California-based company should be able to keep increasing those juicy dividends based upon several factors:
1. It has a low payout ratio. Only 27% of its earnings are returned to shareholders, allowing plenty of room for future growth.
2. It has lots of free cash flow.
3. It has a low long-term debt-to-equity ratio (9%). It can afford to pay shareholders (through dividends and buybacks) instead of the bondholders and banks.
4. The energy industry is expanding. Demand is rising moderately and based upon innovative production techniques that the company uses (such as hydraulic fracturing and directional drilling), supplies are plentiful to satisfy the demand. Chevron Corporation (NYSE:CVX) is also poised to profit from exporting liquid natural gas to countries where prices are higher than in the U.S.
Conclusion
After running the screen and looking at the fundamentals in detail, it appears that Chevron Corporation (NYSE:CVX) is a good choice to add to a retirement portfolio of dividend-growing stocks. All of the factors, such as a low payout rate, low debt, positive growth prospects and cash flow, indicate a buy.
The Procter & Gamble Company (NYSE:PG) also appears to meet most of the criteria. You should keep an eye out for a reversal of the recent earnings slowdown before taking the plunge.
Kimberly Clark Corp (NYSE:KMB) meets all of the criteria I outlined above except for the fact that the debt level is worrisome for now. It can also be kept on the short list for the future.
The article A Giant Dividend Grower for Your Retirement Portfolio originally appeared on Fool.com and is written by Mark Morelli.
Mark Morelli owns shares of Procter & Gamble. The Motley Fool recommends Chevron, Kimberly-Clark, and Procter & Gamble. Mark is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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