Top Five Dow Dividend Companies

Karin is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

One thing I love to do, when I am examining new companies for their possible inclusion in my Dividend Portfolio, is to take a look at the companies that someone else thinks are worthy, and then subject those companies to my criteria to see if I agree.

I have developed a scoring system that rates dividend-paying companies across seven criteria. Whenever I run across an article on financial websites that recommends dividend companies, I take that list and evaluate it against my own. It’s interesting to me to see how little duplication appears in these “best” lists. Everyone has different criteria for defining what makes a great dividend-paying company.

I am always open to new ideas – so far I only have four companies in my Dividend Portfolio: Abbott Laboratories, PartnerRe Limited, Enterprise Products Partners, and Cracker Barrel Old Country Store.

For this article, I took a look at 15 companies listed by Dividend Channel as being highly-rated by the analysts who cover them, and I took the top five to examine further.

The first company on the list is Microsoft (NASDAQ: MSFT). Microsoft is currently trading at $27 per share and yields 3.4%. The company has been paying and raising dividends for 6 years, and has a 5-year DGR of 15.3%. The PE is 14.5, and the twelve-month total return is 7.3%. The payout ratio is a sustainable 45%, so the dividend appears secure. The company is currently trading at 19% less than its 52-week high of $32.95, which was reached in March, and up only 4% from its low of last year.

The 40 analysts who cover the company rate the stock a 2.0 (1.0 = Strong Buy, 5.0 = Sell), with 15 Strong Buys, 12 Buys, and 13 Holds. They have set a one-year target price on the company of $34.44, which is a potential gain of 26%. The Motley Fool community is not as convinced, and rates MSFT only a three-star CAPS pick, with 13,784 Bulls and 2,036 Bears (87% positive sentiment).

Microsoft scores a 14 on my ratings system, which is not high enough for it to be more thoroughly considered for my Dividend Portfolio. Although its professional analyst sentiment and dividend-raising history is very good, the company scores low on my metrics of dividend-paying history and recent price performance.

The next company is General Electric (NYSE: GE). Yielding 3.7%, GE is trading at $20 per share. The company has been paying dividends since 1899, but cut its dividend in 2009 and again in 2010 during the fiscal crisis. The PE is 16, and the twelve-month total return is 17.5%. The payout ratio is reasonable at 56%. The company is currently trading at 12% less than its 52-week high of $23.18, reached in October, and up 15% from this time last year.

The 16 analysts who cover the company rate the stock a 2.0, with 4 Strong Buys, 8 Buys, and 4 Holds. They have set a one-year target price on the company of $24.71, which is a 21% potential gain. The Motley Fool community rates GE a four-star CAPS pick, with 15,454 Bulls and 1,045 Bears (94% positive sentiment).

General Electric scores a 13 on my ratings system, which is too low to qualify for my Dividend Portfolio. It is actually doing well recently, but the cut to its dividend only a couple of years ago makes it a no-go for my portfolio.

The third company on the list is Merck (NYSE: MRK). Merck is currently trading at $41 per share and yields 4.2%. The company has been paying dividends since 1935, but it froze its dividend in 2010. The PE is 18.6, and the twelve-month total return is 12.9%. The payout ratio is high at 77%. The company is currently trading at 15% than its 52-week high of $48, reached in October, and up 10% from its price a year ago.

The company gets a 2.1 rating from the 21 professional analysts who cover it, with 5 Strong Buys, 8 Buys, and 8 Holds. The one-year target price is $47.79, which is a potential gain of 16.5%. The Motley Fool community rates MRK a four-star CAPS pick, with 2677 Bulls and 206 Bears (93% positive sentiment).

Merck scores only an 8 on my ratings system, which is far too low to qualify for my Dividend Portfolio. The current dividend yield is terrific, but its payout ratio is high, and I am not confident of the company’s ability to continue raising the dividend in the future.

Pfizer (NYSE: PFE) is currently trading at $26 per share and yields 3.8%. The company has been paying and raising dividends for only 2 years, and its 5-year DGR of -3.2% reflects the dividend cut in 2010. The PE is 20.3, and the twelve-month total return is 21.7%. The payout ratio is high at 68%; this factor was potentially one that led to the dividend cut. The company is currently trading at its 52-week high.

The 21 analysts who cover the company rate the stock a 1.9 with 9 Strong Buys, 8 Buys, 3 Holds, and 1 Sell. They have set a one-year target price on the company of $27.78. The Motley Fool community rates PFE a four-star CAPS pick, with 5457 Bulls and 588 Bears (90% positive sentiment).

Pfizer scores only a 9 on my ratings system, which is too low to qualify for my Dividend Portfolio. The analysts call it a Strong Buy, but they don’t actually estimate much growth over the next year, which I find strange. Certainly a company with this good of a rating should merit more than a 2% 5-year growth rate (or vice versa – surely a 2% annual earnings growth rate over the next 5 years does not merit a Strong Buy rating.)

The last company on my list is Chevron (NYSE: CVX). The company is currently trading at $110 per share and yields 3.3%. The company is a true Dividend All-Star, and has been paying and raising dividends for 20 years, with a 5-year DGR of 9.3%. The PE is 9.1, and the twelve-month total return is 4.9%. The payout ratio is very reasonable at 29%. The company is currently trading at 7% less than its 52-week high.

The 23 analysts who cover the company rate the stock a 2.1, with 5 Strong Buys, 12 Buys, 5 Holds, and 1 Underperform. They have set a one-year target price on the company of $123.26, which is a potential gain of 12%. The Motley Fool community rates CVX a five-star CAPS pick, with 4056 Bulls and 163 Bears (96% positive sentiment).

Chevron scores a 15 on my ratings system, which is too low to qualify for my Dividend Portfolio.

Here is a chart of the five companies and how they score on my ratings criteria.

 

In conclusion, these are popular companies among investors and among the analysts who cover them, but not one of them merits inclusion in my dividend portfolio.


khern0203 has no position in any stocks mentioned. The Motley Fool recommends Chevron Corp. The Motley Fool owns shares of General Electric Company and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus

Compare Brokers

Fool Disclosure