Why I Just Invested in This Dividend King -- Even Though a Smaller Rival Has Grown Faster.

I recently added Procter & Gamble (NYSE:PG) to my portfolio. I was seeking a durable consumer-staples stock to add more defensive ballast at a time when the market is trading at a historically rich valuation. As a Dividend King, a company with 50 or more years of dividend increases, P&G has demonstrated its durability over decades (it has raised its dividend for 70 straight years).

I conducted an exhaustive review, including analyzing faster-growing rivals such as Church and Dwight (NYSE:CHD). Despite its slower growth, I think P&G can deliver a higher total return over the next decade, which drove my decision to invest in Procter & Gamble.

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A strong runner-up

I review several consumer staple stocks in search of a durable portfolio anchor. Some offered higher dividend yields, while others are growing faster. Church & Dwight stood out for its growth. The company owns seven power brands (TheraBreath, Hero, Touchland, Arm & Hammer, Waterpik, Batiste, and OxiClean) that represent more than 75% of its sales and profits.

Over the past decade, Church & Dwight has delivered more than 4% compound annual organic revenue growth. Meanwhile, it has grown its adjusted earnings per share at an average annual rate of more than 8%, driven by margin-enhancement initiatives, share repurchases, and acquisitions. That strong earnings growth rate drove a similar increase in the company's share price (7.8% annually over the past decade). Add in the growing dividend, and the total return is just over 9% annualized. A solid, though unspectacular, total return, especially compared to the broader market during that period.

Looking ahead, Church & Dwight aims to deliver 4% organic sales growth over the long term and 8%+ earnings-per-share growth. That should support continued dividend growth (30 straight years).

The problem with Church & Dwight is two-fold. Investors are currently paying a premium for its faster growth (it trades at 26 times forward earnings). That higher valuation is one reason why it has a lower dividend yield (recently around 1.2%). The company would need to sustain its high growth rate and valuation multiple over the next decade to deliver 9% annualized total returns. If its earnings growth slowed to 7% annually and its valuation multiple contracted to 22 times earnings, its total annualized return would be more modest at around 6.5%.

This King reigned supreme

Procter & Gamble owns a laundry list of iconic consumer household brands, including Bounty, Charmin, Crest, Dawn, Gillette, and Pampers. Demand for these products is durable and steadily rising. While the company is currently facing demand headwinds due to persistently high inflation, it's still delivering low-single-digit growth in organic sales and core earnings per share.

The company's long-term targets are to deliver organic sales growth ahead of the market and mid- to high-single-digit core earnings-per-share growth as its margins improve.

Because P&G is growing more slowly these days amid current headwinds, it trades at a lower valuation than Church & Dwight, at less than 22 times forward earnings. That lower valuation is one reason why it currently offers a higher dividend yield (recently around 3%).

That setup of a lower starting valuation and higher current yield provides investors with more income and a greater margin of safety. It also positions P&G to deliver higher total returns over the next decade, even if it continues to grow more slowly than Church & Dwight. For example, if it grows its earnings at a 5% annual rate while continuing to increase its 3%-yielding dividend, it can deliver an annualized total return of around 8% with no change in its valuation multiple.

There's upside if P&G's earnings grow faster and its valuation multiple expands. It has historically traded above 25 times earnings and has only recently fallen to a lower level due to near-term margin pressures. As its current headwinds fade, I expect its valuation multiple to improve. That could push its total annual return to the 9% to 10% range. Unlike Church & Dwight, I don't need P&G to deliver a high growth rate over the next decade to deliver a high total return.

A more attractive investment opportunity right now

Church & Dwight is a great company that's growing faster than P&G. However, it would need to continue growing faster over the next decade to deliver higher returns than its larger rival, given its higher valuation and lower dividend yield. That's why P&G stood out as the better long-term investment opportunity right now. Thanks to its lower valuation and higher yield, it doesn't need to deliver fast growth to produce strong total returns. That makes it an ideal holding for me, as it provides great defense and a solid offensive profile.

Matt DiLallo has positions in Procter & Gamble. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.