4 Great Dividend Increases

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

According to the financial website InvestorPlace, 50 blue-chip companies raised their dividends during the second quarter of 2013. This despite stock market declines, which were reportedly because of the Federal Reserve’s hints that it may begin easing back on stimulus by as early as September.

Investors are still flocking to dividend companies, even though bond interest rates are starting to increase. Dividend companies can offer a steady income stream along with the potential for share-price increases, but you have to choose your dividend payers carefully.

If you’ve read any of my articles, you know that I am a huge dividend fan. I’ve been writing about dividend-paying companies for about a year, I’ve designed a ratings system to help me select the best companies, and I’ve built my Perfect Dividend Portfolio (PDP), featuring 10 stocks that I believe will perform better than other dividend portfolios.

I look for a combination of an excellent dividend-raising history, high current yield, and superior potential for earnings growth. Earnings are important, and I take into account the projected five-year earnings growth rate as well as the current PE and share-price increase over the past 12-month period.

For this article, I examine the 50 companies listed in an Investor Place article, and pull out the four that I believe represent the best opportunities today in order of how they score on my ratings system. One company is already in my PDP and one I reviewed recently; I looked at the third several months ago, and I have never even examined the fourth.

Darden Restaurants hit the spot

Darden Restaurants (NYSE: DRI) is the casual-dining chain that includes Olive Garden, Red Lobster, Longhorn steakhouses, Bahama Breeze, and the Capital Grill.

The stock was recently hovering at $51 per share and yields 4.4%. The company has raised its dividend every year for eight years, which is lower than my requirement of 10 years; the last increase was declared on June 20 for payment in August, an increase of 10%. The company has an astonishing five-year dividend growth rate (DGR) of 25%, and a payout ratio of 63%.

Despite reporting increased revenue, Darden recently missed hitting its FY 4Q earnings estimate, and both gross and net margins fell from the prior quarter. The company has had to reduce prices and resort to more promotional offerings in order to keep traffic up, which has hit the bottom line. The stock took a hit, too, dropping by nearly 10%.

The payout ratio is on the high side, so any further hits to earnings may translate to consequences for the dividend. Darden's 4% dividend is tempting, but keep an eye on revenue and earnings for the near future.

Clorox is boring but reliable

I reviewed Clorox (NYSE: CLX) about two weeks ago, so I’ll summarize my conclusions here.

Clorox is currently trading at $83 and yields 3.4%; the company has been raising dividends consistently for 36 years, and has a five-year DGR of 12.2%. Its five-year projected earnings growth rate is 7.2%, and its PE is 19.5.

Clorox most recently raised its dividend by 11% in May, after reporting slightly negative numbers for FY 3Q. Clorox has returned 20% over the past 12 months, and its stable of dependable-but-boring cleaning brands provide a solid foundation for paying dividends well into the future.

However, while Clorox doesn't seem in any immediate danger of being unable to pay its dividend, the stock price itself may offer risk. The trailing-12 month PE at 19.5 is running quite high against the company's historical PE, and the PEG ratio of 2.7 indicates that the share price may have gotten quite a bit ahead of its historical growth measurements.

I already own Chevron

Chevron (NYSE: CVX) was recently trading at $119 and yields 3.4%. The company has been raising its dividend every year for 19 years, and sports a five-year DGR of 9%. The last increase in the dividend was in May, when the company raised it by 11%.

Chevron's management must be feeling confident about the company’s future; they are planning to build a new 50-story, 1.7 million square foot skyscraper in downtown Houston to house the company's expanding workforce. Groundbreaking will begin in 2014, with occupancy expected for 2016. This building joins the two other Chevron buildings in downtown Houston, both formerly owned by Enron.

Chevron’s low payout ratio (27%) and low PE (9.0) argue for purchase now, but its extremely low projected earnings growth rate (EGR) of 0.8% is quite a damper. Nevertheless, I did choose Chevron for my PDP in April and stand by my decision.

Why have I never looked at Safeway?

Safeway (NYSE: SWY) was recently trading at $24 and yields 3.4%, with a five-year DGR of 19.3%. On top of a low payout rate of 24% and a low PE of 9.7, I’d say Safeway looks like a pretty compelling dividend buy.

Safeway announced it would raise its dividend in May, for a 14.3% increase. The company was just reiterated as a Buy by TheStreet.com, where the author cited strong earnings-per-share and net-income growth over the same quarter last year.

Safeway's EPS increased by 63% due to a favorable tax situation, which dropped the company's tax expense from 30% to 2.1%. (We can debate the ethical and patriotic meaning of this tax situation in another forum.) Without the tax break, the earnings would have increased by 17%, still an impressive figure.

Safeway has a PE of 9.9 and a PEG of 1.5, both indicating that the company is not overvalued. It's paying out only 30% of free cash flow in dividends, so it's not in any danger of being unable to continue.

If I didn’t have a complete portfolio already, and if I weren’t determined to stick to a 10-year-or-more criterion for my portfolio, Safeway would be an extremely strong contender for inclusion.

Conclusion

I put both Clorox and Darden Restaurants on my "Watch" list. I suggest you do the same. 

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Karin Hernandez has a position in Chevron. The Motley Fool recommends Chevron. The Motley Fool owns shares of Darden Restaurants. 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!

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