Is Now A Good Time To Sweeten Up Your Portfolio?

One of life's enduring pleasures, chocolate, can give your portfolio a sugar rush, but what price is fair to pay? Confectioners Hershey (HSY -0.53%), Tootsie Roll (TR -0.40%), Nestle (NSRGY -1.55%), and Mondelez (MDLZ -0.71%) all sport world-renowned franchises. These companies make products that anyone would be happy to be a part owner of, but can they turn their rivers of chocolate into streams of quality income for their investors?

A good place to start is to check the dividend payout ratio, which tells us if the company has enough earnings to cover its dividend payments. 

As a general rule of thumb, payout ratios in excess of 70% are cause for concern. Each of these chocolatiers is well under that, so each appears to be safe after the first test.

Next, let's check the dividend yield to see how much income these companies generate for investors.

Next, what are the prospects for growth? No one can predict the future, and certainly no one number can, but Return on Equity is a good indicator of overall business quality. The current dividend yield for the S&P 500 is 1.9%, so an investor would probably prefer a yield that is above that level. Nestle is the only one of the four companies that pays its owners more than the market yield, though it should be noted that Nestle's dividends as a Swiss company may be subject to additional foreign withholding tax.

You have to pay for quality, so for the last check we'll use the P/E ratio to determine relative cheapness. Hershey's Return on Equity is shockingly good, not the kind of number you would expect to see in the staid world of chocolate, and as such Hershey's stands out from the pack. A good, rough guideline for quality businesses is at least 15% Return on Equity, and both Nestle and Hershey's clear this hurdle (Hershey by a country mile).

Based on these simple quantitative factors, Nestle appears to be the best choice for quality income. All the companies pass the safety screen, while Hershey's and Nestle both earn impressive Returns on Equity. But Hershey pays only the market average dividend yield and sells at a double digit premium to the market and to Nestle. Nestle is the cheapest stock based on P/E and returns a full 42% more in dividends. That's a sweet treat for Nestle investors.