The Weekly Dividend

Thrilling corporate egomaniacs everywhere, Fortune magazine recently announced the 2007 version of its Fortune 500 rankings. The annual list always creates considerable buzz in the investment community. But I couldn't help wondering: Does the list merely fill pages for Fortune while stroking the egos of America's wealthiest executives? Or can dividend jockeys like us use it to find market-beating investment opportunities?

Start from the top
Fortune's rankings are based on total revenues. In that spirit, we'll analyze the list's top seven firms. Unlike Fortune's system, however, we Fools really care about how much each firm pulls down to the bottom line from each dollar of sales. As such, this chart shows the list's top seven companies, sorted by their normalized net margins:

A quick scan of this list shows a couple of dogs not worth the trouble of those seeking steady dividend hikes: GM and Ford. Both manufacturers slashed their dividends in 2006 -- GM by half, Ford with a full-on suspension -- in an effort to help stop their bleeding. Should fans of dividend growth generally be interested in capital-intensive companies that have powerful unions and struggle to make ends meet, even during periods of positive real GDP growth? Negatory. Let's pass on these guys.

That leaves us with three Big Oil buddies, the mother of all retailers, and the father of all conglomerates. Let's compare their dividend-centric metrics and their prospects for future dividend growth:

You're probably noticing that the expected dividend growth rate of the Big Oil trio is remarkably higher than their actual dividend growth over the past five years. That stems from the abnormally fat profits Big Oil earned in 2006, which hoisted these companies' returns on equity to nosebleed levels. I expect future dividend growth in the space will be much closer to historical norms than the estimated figure. Then again, growth of 7.1% to 15.5% is certainly nothing to sneeze at.

Exxon: Crude and sweet
Of the three Big Oil stocks discussed, ExxonMobil is unquestionably the best. The company has consistently pulled in higher margins and returns on equity and invested capital than its peers, over virtually any time horizon. Exxon had earnings of $39.5 billion last year, which exceeds the market cap of three of its fellow Dow 30 components.

Though the company is trading at a cheap-sounding 11.2 times 2006 net income, keep in mind that this follows prolonged elevated oil prices. Unless we're in the midst of a long-run bull market in oil, investors probably won't reap abnormally high returns at this entry point. Furthermore, at 1.6%, its yield actually lags that of the S&P 500. Hardly sexy.

Still, as my friend and Fool contributor Dave Smith is often wont to point out, declining production at the world's largest oil fields, geopolitical instability in oil-rich countries, and the world's ever-increasing thirst for energy all point toward long-run price support for the commodity. If these trends continue, dividend reinvestors with a long time horizon should do quite well with an Exxon investment.

General Electric: Generally confusing
Have you ever encountered an investment opportunity with so many moving parts that you just said "pass" and moved on to the next idea? For me, that stock has always been GE. Perhaps I place too great a premium on my time, but I just can't get excited about the complexity of valuing each of GE's operating segments in an effort to gauge intrinsic value. I could analyze several companies in the time it would take me to accurately compute one valuation for GE.

My lack of interest aside, you simply can't ignore the company's long-run success and results-oriented culture, which I happen to admire. Given GE's rock-solid balance sheet, and its yield of 3.2% -- a payout for which you can reasonably expect 8% to 9% growth over the next several years -- dividend-focused investors could probably do a lot worse.

Wal-Mart: Priced low, every day
Wal-Mart's shares have been treading water for years because of decelerated same-store sales growth, indigestion with some of its international expansion plans, and what I'll favorably call an "image problem." Though its 1.8% yield roughly matches the S&P 500's, the payout has plenty of room to run, given the company's stellar history of earnings growth, its low payout ratio, and its high returns on equity. A 3.6% yield-on-investment five years from now would hardly be a stretch. Not too shabby!

Wal-Mart's shares currently trade at a slight discount to the general market, and well below the firm's historical mean. Despite the company's challenges, that's just plain silly, given Wal-Mart's status as the world's leading retailer and the model of efficiency. Even with virtually no multiple expansion and growth rates below analysts' expectations, I conservatively value Wal-Mart's shares at roughly $52 a stub, implying a margin of safety around 8%. Over the next few years, if Wal-Mart meets or exceeds expectations and experiences even slight multiple expansion, investors should be handsomely rewarded. As such, I consider Wal-Mart the best place for new money among the firms topping the Fortune 500.

Further reading
If you're interested in stock picks from the realm of dividend goodness, check out a free 30-day trial of James Early's Motley Fool Income Investor newsletter. If you're thirsting for more beyond that, check out last week's version of "The Weekly Dividend," or a couple of Foolish dividend-focused articles from the past week:

• The Most Unlikely Growth Stocks
• 2 Stocks I'm in Love With
• Hunting for the Next Dividend Winner

Foolish editor Joe Magyer pays his roommate $20 for each witty footer she comes up with. She didn't deliver this week. Joe's holdings and CAPS profile are always available for your viewing pleasure. Wal-Mart is an Inside Value pick. The Motley Fool has a strict disclosure policy.