I’ve been developing my own Perfect Dividend Portfolio over the past 4 months, and I actually am quite pleased with how it has been going.
I still have two more companies to select, however, and I have been having a difficult time finding ones that meet my admittedly overly-strict criteria. Today I am looking at three companies that are being accumulated by the so-called smart money, to see if I agree with any of them.
In my examination, I review the companies on seven different criteria: yield, number of years paying and raising dividends, 5-year Dividend Growth Rate (DGR), 5-year projected Earnings Growth Rate (EGR), total return for the past twelve months, PE 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 previous named criteria. A “perfect” score would be 28 points, with 4 points awarded in all seven categories.
The first company, which is a new addition to Warren Buffett’s portfolio, is Archer Daniels Midland Company (NYSE:ADM), a food processing company. Buffett reportedly bought into the company in December, and Jim Cramer recently called the stock a Buy.
The company is currently trading at approximately $32 and yields 2.3%. It has raised dividends every year for 38 years, its 5-year DGR is 8.5%, and it has returned 6.6% over the past twelve months.
Other metrics that I use when calculating a rating for a dividend company include the analysts’ 5-year annual growth estimate (10.0%), the company’s PE (15.6) and its dividend-payout ratio (50%).
Archer Daniels Midland Company (NYSE:ADM) scores a 15 on my ratings system, which is too low to make it into my portfolio. I like the company’s DGR and EGR, its payout ratio and PE are both reasonable, but its yield is too low for me.
The second company is Chesapeake Energy Corporation (NYSE:CHK), a natural gas company. I have several energy companies in my portfolio, but they are pipeline MLPs. Natural gas has been a good market, but Chesapeake has been a bad company to invest in.
It has a terribly scandalous recent history, but Mohnish Pabrai has now put 17% of his portfolio into Chesapeake, so obviously he thinks it’s a good investment.
The company is currently trading at approximately $21 and yields 1.6%. It has raised dividends every year for only 2 years, its 5-year DGR is 6.0%, and it has lost 11.6% over the past twelve months.
The analysts’ 5-year annual growth estimate is a staggering 45%, the company’s forward PE is 17.4 and its dividend-payout ratio is 23%.
I don’t even consider Chesapeake Energy Corporation (NYSE:CHK) a dividend company, but its forward growth estimate is intriguing. Maybe Mr. Pabrai will be proved right.
The third company on the list is Johnson & Johnson (NYSE:JNJ), which is a perennial dividend favorite. I haven’t looked at JNJ in a few months, so I will take a look and see if I feel the same as Prem Watsa, whose portfolio lists JNJ as his number 2 holding.
The company is currently trading at approximately $78 and yields 3.1%. It has raised dividends every year for 50 years, its 5-year DGR is 8.0%, and it has returned 24.9% over the past twelve months.
The analysts’ 5-year annual growth estimate is a 6.4%, the company’s PE is 20.3 and its dividend-payout ratio is 63%.
Johnson & Johnson (NYSE:JNJ) scores a 16 on my rating scale, again, a little too low for my portfolio. It’s a solid dividend payer, just not quite good enough.
So I don’t agree with the smart money, apparently. Only time will tell if I am wrong. But so far, I have been very pleased with my results, so I am not doubting my methodology yet.
The article Three Smart Money Dividend Companies originally appeared on Fool.com and is written by Karin Hernandez.
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