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Dividend stocks are everywhere, but many just downright stink. In some cases, the business model is in serious jeopardy, or the dividend itself isn't sustainable. In others, the dividend is so low it's not even worth the paper your dividend check is printed on. A solid dividend strikes the right balance of growth, value, and sustainability.
Today, and one day each week for the rest of the year, we're going to look at one dividend-paying company that you can put in your portfolio for the long term without too much concern. This isn't to say these stocks don't share the same macro risks that other companies have, but they are a step above your common grade of dividend stock. See last week's selection.
This week, I want to focus on a globally familiar brand to both young and old investors, Clorox (NYSE: CLX ) .
The Clorox advantage
Clorox, the company behind household and personal products Pine Sol, S.O.S., Liquid-Plumr, and, of course, the Clorox brand, is readying to celebrate its 100th year since its founding in 2013, and its prospects for growth are looking as fresh as ever.
The company, which has four operating segments -- cleaning, household, lifestyle, and international -- fits the bill as both a Peter Lynch "buy what you know" candidate because it has easily recognizable products and an easy-to-understand business model, and as a necessity stock. I've often touched on the idea of adding necessity stocks to your portfolio for the long term as they provide downside protection because of the inelastic prices on many of their products. With much of Clorox's revenue derived from grocery aisle goods, its pricing power will continue to remain strong.
This mixture of name brand recognition, an easily understood business model, and strong pricing power is what continues to drive Clorox innovation and growth. In Clorox's fourth-quarter report, the company highlighted a 4% increase in sales, driven by an increase in both volume sold and in prices. Its forecast for 2013 was equally as impressive, given what macroeconomic uncertainties currently exist at home and internationally, calling for sales growth of 2%-4% and margin expansion of 25 to 50 basis points.
Clorox's peer stumble
Relative to its peers, Clorox is facing far fewer headwinds at the moment. Procter & Gamble (NYSE: PG ) recently lowered its earnings outlook for a second straight quarter due to weakness in its beauty and grooming segment, as well as its inability to raise prices in key markets. Motley Fool blogger Chad Henage did a remarkably good job highlighting this fact in a recent blog submission. Similarly, Church & Dwight's (NYSE: CHD ) forecast has failed to live up to expectations because of a pricing war with PG in the laundry segment, and because of higher sales of low-margin products.
Even for Clorox's peers that aren't having as many pricing issues as P&G or Church & Dwight, their outlook remains clouded by other exterior factors. Kimberly-Clark (NYSE: KMB ) , which may I add is a previously featured great dividend you can buy right now, is still in the process of restructuring its pulp and tissue operations and has yet to make large inroads in expanding overseas. Colgate-Palmolive (NYSE: CL ) witnessed volume growth of 5% aided by increases in its most recent quarter, but it relies on international sales for a vast majority of its revenue, leaving itself exposed to currency fluctuations and waning consumer demand in Europe.
Without question, Clorox is in the sweet spot of the consumer non-durable segment, and it's one of the very few companies able to combine volume growth with pricing power in order to move the needle higher.
Cleaning up with a high-yielding dividend
Let's face it, the real draw of Clorox, other than the fact that it's one of the most stable companies you can buy, is its consistent, and recently rapid, dividend growth. Clorox has raised its dividend for 35 straight years, placing it among the elite few dividend aristocrats that have raised their annual payouts for the past 25 years or more.
Source: Dividata, *Assumes $0.64 quarterly payout for remainder of 2012 and all of 2013.
Since April 2007, Clorox's quarterly dividend has more than doubled; since July 2002, it's more than tripled! At a projected yield of 3.6%, Clorox's dividend trounces the average 2.1% yield of the S&P 500, and its payout ratio of 59% means shareholders are getting a bigger chunk of the net income pie than shareholders of Colgate-Palmolive, P&G, and Church & Dwight.
With much of its business tied to household and lifestyle products within the United States that have sticky prices and strong brand recognition, there's little reason to believe that Clorox won't be a successful company for another 100 years. Clorox is paying shareholders a significant premium to many other S&P 500 companies and has managed to increase product sales as well as prices. That's a formula I'd bet on to succeed every single time!
If you're craving even more dividend ideas, I invite you to download a copy of our latest special report, "9 Rock-Solid Dividend Stocks," which is loaded with income-producing companies hand-selected by our top analysts. Best of all, this report is free, so don't miss out!