The Billion-Dollar Bargain Bin

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"You could hardly go wrong by making an entire portfolio of companies that have raised their dividends for 10 or 20 years in a row." 

That’s advice from none other than Peter Lynch, one of the greatest investors of all time.

While there are many ways to buy dividend stocks, I like to purchase assets in unloved and out-of-favor sectors. Niches so boring or slow-growing that any investment seems like a potential waste of money. Earlier this year, for example, I was buying electric utility stocks when nobody wanted them.

One of my top picks was Portland General Electric Company ($POR). I was buying this stock throughout May, June, and July. The company was yielding over 5% and nobody was interested in it.

Since then, shares have quietly climbed by +14.85%.

Buying Portland General Electric Company delivered similar returns to the S&P 500, but with four times the starting yield of a typical S&P 500 ETF.

Now, I have my eye on consumer staple stocks. This entire sector is out-of-favor and many consumer staple businesses are trading near their multiyear lows. As such, several of the “bluest of blue chip” companies in this space are offering starting yields of 3-5%.

Here are three quality names worth watching...

1. The Procter & Gamble Company ($PG)

The Procter & Gamble Company has paid dividends every year for 135 consecutive years. The firm has also raised its dividend for the past 69 years.

Procter & Gamble is almost like a mini consumer staples ETF in and of itself. The firm owns 25 different brands that each generate over $1 billion on their own. These billion-dollar brands include: Crest toothpaste, Dawn dish soap, Tide laundry detergent, Oral-B oral hygiene products, and Bounty paper towels.

Shares of Procter & Gamble are down over -12.50% year-to-date and this has pushed the company’s starting dividend yield all the way up to 2.87%.

With a safe dividend payout ratio of 59.89% and a 5-year compound annual dividend growth rate of 6.02%, this is a decent “buy it and forget it” investment. Procter & Gamble might not be the most exciting stock, but it is a long-term winner with over 100 years of uninterrupted dividend payments.

2. The Clorox Company ($CLX)

The Clorox Company has raised its dividend every year for 48 years.

Clorox was founded over 100 years ago, but the firm has a somewhat complicated corporate history due the fact that it was briefly acquired by Procter & Gamble.

The Clorox Company is a much smaller business than any of the other companies featured in this report, with a market cap of only $13.47 billion, but it’s a relatively high-yield consumer staple business with a portfolio of recognizable brands.

The firm produces Clorox bleach, Pine-Sol cleaning products, Glad trash bags, Burt's Bees lip balm, and Brita water filters.

Shares of The Clorox Company are down more than -32% year-to-date and the stock is now paying a 4.49% starting dividend yield.

While not as good a payout ratio as Procter & Gamble, The Clorox Company still maintains a reasonably safe dividend payout ratio of 73.21%. Since this payout ratio is on the higher side, Clorox’s dividend growth rate is relatively anemic. The firm has a 5-year compound annual dividend growth of 2.54%. Slow-growth, but offset by the high starting yield.

3. Kimberly-Clark Corporation ($KMB)

Kimberly-Clark Corporation has paid a dividend every year for 91 consecutive years.

The company has also raised its dividend every year for 53 consecutive years.

Kimberly-Clark is a consumer staple stalwart that makes Kleenex tissues, Scott toilet paper, Huggies diapers, and “Kimberly-Clark Professional” janitorial supplies such as paper towels and soap dispensers.

For many years, Kimberly-Clark offered moderate yields and slow dividend growth. Fine for retirees who want dependable income, but not so enticing for younger investors.

That’s all changed with some recent news.

This week, Kimberly-Clark Corporation announced plans to acquire Kenvue Inc., Johnson & Johnson’s consumer health spin-off. Shareholders did not like this, and Kimberly-Clark stock plunged by more than -15% in one day.

Kimberly-Clark is now down by more than -23% year-to-date, a situation that’s pushed the firm’s starting yield up to 5.01%.

With a payout ratio of 72.67%, Kimberly-Clark’s dividend should remain safe. And while the firm’s 5-year compound annual dividend growth rate of 3.35% still isn’t all that exciting, the high starting yield makes up for this slow-growth. Plus, there’s rebound potential once shareholder sentiment improves.

Conclusion

Like electric utilities, consumer staples are a sector that it’s hard to get excited about.

And that’s a good thing…

Toilet paper and trash bags are essential, recurring purchases. And getting a 3-5% starting yield on these blue chip businesses is nothing to sneer at. You’re getting a dependable investment with a lengthy track record for rewarding shareholders, plus capital gains potential once Wall Street cycles back into the sector.

Of these three companies, The Procter & Gamble Company is probably the safest bet due to its low payout ratio and enormous portfolio of consumer staple brands.

Meanwhile, Kimberly-Clark Corporation is the most “risky” firm listed. This is entirely due to the potential Kenvue merger, which might slow Kimberly-Clark’s dividend growth rate even further.

Lastly, The Clorox Company is a solid middle ground option. It’s a stable business with a strong yield and modest growth.

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Disclaimer: This article is for entertainment purposes only. It is not financial advice, always do your own research.