Published August 15th, 2016
The Dividend Aristocrats are a group S&P 500 that have each paid increasing dividends for 25+ consecutive years.
There are currently only 50 Dividend Aristocrats. What’s important about the Dividend Aristocrats is how well they have performed. The image below shows the Dividend Aristocrat’s performance over the last decade
Source: S&P Factsheet
Not all Dividend Aristocrats are good investments, especially in today’s overvalued market. Low interest rates have pushed up real asset values, especially dividend stocks. This makes finding high quality dividend growth stocks trading at reasonable prices more difficult.
This article uses The 8 Rules of Dividend Investing to identify the Top 10 best Dividend Aristocrats at current prices. The rankings are determined using a mix of:
- Dividend yield (the higher the better)
- Payout ratio (the lower the better)
- Volatility (the lower the better)
- Expected growth rate (the higher the better)
- Total return (the higher the better)
- Price-to-earnings ratio (the lower the better)
All Dividend Aristocrats pass the 1st rule of The 8 Rules; to have 25+ years of dividend payments without a reduction. There are currently over 180 stocks in the Sure Dividend database that pass this constraint.
The 8 Rules find high quality dividend growth stocks trading at fair or better prices. This article applies these ranking metrics to the Dividend Aristocrats.
The top 10 best Dividend Aristocrats using The 8 Rules of Dividend Investing are below.
Coca-Cola (KO) is one of the most well-known corporations in the world. The company’s ubiquitous red cans and bottles of soda show the power of the company’s brand. Coca-Cola is the largest beverage corporation in the world. The company currently has a market cap of over $188 billion.
Coca-Cola is among the most stable businesses in the world. Not only is Coca-Cola a Dividend Aristocrat, the company is also a Dividend Kings. There are currently only 18 Dividend Kings; dividend stock with 50+ years of consecutive dividend increases. Coca-Cola has paid increasing dividends for 54 consecutive years.
There is more to Coca-Cola than just brown soda. In total, the company has 20 brands that generate more than $1 billion a year in sales. Out of those 20 brands, 14 are non-carbonated. Coca-Cola owns an impressive portfolio of still brands, including: Simply juices, Dasani water, Vitamin Water, and Gold Peak Tea (among others). The image below shows more of the company’s still brands
Coca-Cola is currently trading for a price-to-earnings ratio of 20.7 using adjusted earnings. The company is likely trading around fair value in today’s low interest rate environment. Coca-Cola also has a dividend yield of 3.2%, which is significantly above market averages.
What makes Coca-Cola such a wonderful business is that it can return the bulk of its cash flows to shareholders; it need reinvest little back into the mature business. The company’s higher-than-average ~70% payout ratio reflects this. In addition, Coca-Cola regularly returns cash to shareholders through share repurchases.
Coca-Cola is not a value investment, and its rapid growth days are over. Still, the company is a high quality blue chip business that offers investors income growth and stability.
#9: V.F. Corporation
V.F. Corporation (VFC) is one of the world’s largest apparel companies based on its $26.5 billion market cap. The image below shows many of the company’s well-known clothing brands:
The company was founded in 1899 and has a long history of success. V.F. Corporation has paid increasing dividends for 43 consecutive years. The company’s success over the last 100+ years shows that V.F. Corporation has found a way to stay in front of consumer trends in the apparel category.
Many of the company’s brands exhibit longevity that is uncommon in apparel. Lee was founded in 1889, Wranger in 1944, Van’s and The North Face in 1966, and Timberland in 1973. Decades (or over a century in Lee’s case) later, and these brands are still delivering profits to shareholders… All 5 of the above mentioned brands generate more than $1 billion a year in sales.
V.F. Corporation is trading for an adjusted price-to-earnings ratio of 21.5, and a forward price-to-earnings ratio of 17.8. The company is likely trading around fair value at this time given its strength and longevity. V.F. Corporation has a slightly above average dividend yield of 2.3% at current prices.
The company has managed to compound its earnings-per-share at 11% a year over the last decade. I expect the company to continue growing earnings-per-share at more than 10% a year going forward.
The company’s growth will come from a greater focus on its core brands. V.F. Corporation recently agreed to sell its ‘Contemporary Brands’ business for $120 million. The Contemporary Brands include Ella Moss, 7 for All Mankind, and Splendid. The company is also seeking to sell its licensed sports group.
The planned divestitures help to focus V.F. Corporation on its core business. This will likely help the company to continue growing at a double-digit clip.
Pentair (PNR) is an Ireland based industrial equipment manufacturer. Pentair was founded in 1966 and has a market cap of nearly $12 billion. The company has paid increasing dividends for 39 consecutive years.
The company moved its domicile to Ireland in 2012 when it merged with Tyco Flow Control Solutions. The merger allows Pentair to take advantage of the lower Irish corporate tax rate.
Pentair seeks to provide solutions and systems for food water and energy across the globe. The image below gives an overview of the company:
Pentair’s competitive advantage comes from a mix of its diversification among business units, lower corporate tax rate, ability to redeploy capital from lower margin to higher margin businesses, and its ‘integrated management system’ – which focuses on efficiency gains.
Most companies talk about becoming more efficient, but Pentair has actually done it. The company has increased its profit margins by a compound rate of 3.5% a year over the last decade. This growth has caused earnings-per-share compound at 8.0% a year over the last decade, while sales have grown at just 3.0% a year over the same time period.
Pentair offers investors a dividend yield of 2.1%, which is about in line with the market average. The company has maintained a conservative payout ratio of around 33% over the last several years. This gives the company plenty of room to continue increasing dividends going forward.
Pentair currently trades for an adjusted price-to-earnings ratio of 16.7. The company’s price-to-earnings ratio is significantly lower than the S&P 500’s current price-to-earnings ratio of around 25. Pentair appears to be undervalued at this time relative to the S&P 500.
#7: Walgreens Boots Alliance
Walgreens Boots Alliance (WBA) was founded in 1901 in Chicago, Illinois. The company has paid increasing dividends for 40 consecutive years.
Today, Walgreens has a market cap of nearly $90 billion. The company competes heavily with CVS Health (CVS) in the United States. CVS has a market cap of $104 billion.
Walgreens has been able to pay rising dividends over 40 consecutive years thanks to its focus on convenience and its scale. Walgreens’ small store layouts make ‘quick’ shopping trips easier than in big box stores. The company looks for high traffic locations on street corners for ease of access. Prescription refills also create regular traffic for the company.
Walgreens currently trades for a price-to-earnings ratio of 18.9 (using adjusted earnings), and a forward price-to-earnings ratio of 16.7. The company has a below average 1.8% dividend yield, but this is largely made up for by the company’s stability and growth prospects
Over the last decade, Walgreens has compounded earnings-per-share at 9% a year. The company is currently realizing faster growth than its historical averages. The company saw adjusted earnings-per-share grow 15.7% in its most recent quarter, versus the same quarter a year ago. Growth has accelerated due to cost-cutting synergies from the Boots Alliance acquisition.
Walgreens plans to acquire Rite Aid (RAD) for $17 billion. The acquisition appears likely to pass regulation, after initial doubts. The Rite Aid acquisition will add more than 4,500 new stores to Walgreens’ United States operations. For comparison, Walgreens currently operates around 8,200 stores in the United States.
Walgreens is trading for a reasonable price. The company is currently realizing excellent growth, and has future growth drivers in place through further synergies from the Boots Alliance acquisition, organic growth, and the planned Rite Aid acquisition.
#6: Abbott Labs
Abbott Labs (ABT) is one of the oldest health care businesses in the United States. The company was founded in 1888. Today, Abbott Labs has a market cap of $66 billion.
The company has a long history of paying rising dividends; 44 consecutive years (excluding the effects of spin-offs). Abbott operates in 4 business segments. The image below shows those segments, along with revenue growth for the company’s most recent quarter:
Abbott Labs generates around 50% of its revenue from emerging markets, and another 20% from developed international markets. The company’s management has positioned Abbott Labs to take advantage of faster emerging market GDP and population growth.
Abbott Labs is an emerging market stock with first world management and security. The company has made two large acquisitions recently:
- Alere (ALR) for $5.8 billion
- Jude Medical (STJ) for $25 billion
The acquisitions will together significantly enhance Abbott’s diagnostic and medical devices segments, when they close.
Overall, I expect Abbott Labs to compound earnings-per-share at around 10% a year going forward. Growth will come from a mix of organic growth, cost reductions and synergies from recent acquisitions, and share repurchases.
Abbott Labs’ products are difficult to cut back on during recessions. People won’t stop buying baby formula when times get tough, as an example.
Because of this, Abbott has proven to be very recession resistant. The company saw earnings-per-share grow each year through the Great Recession; a feat few businesses can claim. As a result, Abbott Labs stock fell just 5% in 2008 when the S&P 500 declined 38%.
#5: Becton Dickinson
Becton Dickinson (BDX) manufactures and sells medical devices and instruments globally. The company was founded in 1897 and has reached a market cap of $38.2 billion. The company has seen its share price increase substantially over the last several years, as the image below shows:
Becton Dickinson’s share price increase is a primarily due to a significant increase in earnings over the last several years. The company is trading for an adjusted price-to-earnings ratio of 21.0, which is below the S&P 500’s price-to-earnings ratio. Becton Dickinson currently has a dividend yield of just 1.5%, which is below average. The company’s low dividend is a result of its low payout ratio of just 31% of adjusted earnings.
The company’s low payout ratio leaves plenty of room for management to raise the dividend going forward. The company has paid increasing dividends for 44 consecutive years, and there is every indication that this trend will continue going forward.
Becton Dickinson has managed to pay increasing dividends to shareholders for 4 consecutive decades (and counting) thanks to its durable competitive advantage. The company’s competitive advantage comes from its global reach, strong supply lines, and established relationships with both customers and governments.
New entrants to the medical supplies industry would find it extremely costly to recreate the company’s global supply chain.
In addition, the company has a long history of innovation. Becton Dickinson has a competent research and development department that creates new medical devices to sell through the company’s established distribution network.
What Becton Dickinson lacks in yield, it makes up for in growth potential. The company has compounded earnings-per-share at 9.5% a year over the last decade. Analysts expect the company to continue growing at around 9.5% a year over the next several years.
Wal-Mart (WMT) is the largest discount retailer in the world. The company has generated $483.21 billion in sales in the last 12 months. The size and scale of Wal-Mart is hard to fathom. The discount retail king was founded in 1962 in Arkansas. Since that time, the company has grown to its current market cap of $229.94 billion.
Wal-Mart has paid increasing dividends for 43 consecutive years. The company has exhibited rapid growth since its humble beginnings by expanding across the United States, and penetrating key international markets as well.
But growth has slowed for Wal-Mart in recent years. The company is attempting to reposition itself as online sales continue to grow rapidly while brick-and-mortar growth is slowing. Wal-Mart has reached a point of saturation (or near saturation) in the United States.
The company recently announced it will acquire online retailer Jet.com for $3 billion in a move to bolster the company’s online sales. Here’s what Wal-Mart’s CEO Doug McMillon had to say about the recent transaction:
“We’re looking for ways to lower prices, broaden our assortment and offer the simplest, easiest shopping experience because that’s what our customers want. We believe the acquisition of Jet accelerates our progress across these priorities. Walmart.com will grow faster, the seamless shopping experience we’re pursuing will happen quicker, and we’ll enable the Jet brand to be even more successful in a shorter period of time. Our customers will win. It’s another jolt of entrepreneurial spirit being injected into Walmart.”
Wal-Mart is currently trading for a price-to-earnings ratio of 16.4. The company has a dividend yield of 2.7%. Wal-Mart stock has increased its payout ratio significantly over the last several years as it transitions from a growth business to a more mature blue chip stock.
Target (TGT) is a well-known business to United States consumers. The company is the 3rd largest discount retailer in North America based on its market cap of $43.71. The only larger discount retailers are Costco (COST), and fellow Dividend Aristocrat Wal-Mart (WMT).
Target was founded in 1902 in Minneapolis, Minnesota. The company has put together an impressive streak of 45 consecutive years of dividend increases. The company’s quarterly dividend history is shown in the image below:
Target’s competitive advantage comes from its large size and distribution network in the United States, coupled with its well-known brand. Target stores have a reputation for being cleaner and featuring more ‘in style’ merchandise than competitor Wal-Mart. This shows in Target’s higher median household shopper income of $64,000 per year versus $53,000 per year for Wal-Mart.
The discount retail industry has an advantage when times get tough…. Consumers look to get more ‘bang for their buck’ during recessions. This helps discount retailers evade serious earnings declines during recessions. Target saw earnings-per-share fall just 14% during the worst of the Great Recession.
Target has realized excellent growth recently. The company realized 23% e-commerce growth and 16.5% adjusted earnings-per-share growth in its most recent quarter. I expect the company to continue compounding earnings-per-share at around 10% in a year, which is in line with historical growth – excluding the recent botched Canada expansion.
Despite its strong competitive advantage and recent solid growth, Target is not an expensive stock. The company is currently trading for a price-to-earnings ratio of just 13.8. Additionally, Target offers investors an above-average dividend yield of 3.3%.
#2: W.W. Grainger
W.W. Grainger (GWW) is the leader in the United States MRO (maintenance, repair, operations) supply industry. The company was founded in 1927 and has grown to reach a market cap of $13.2 billion.
Like all Dividend Aristocrats, W.W. Grainger has a long dividend streak. The company has paid increasing dividends for 44 consecutive years.
W.W. Graingers’ dividend growth over the last 44 years shows the company has a durable competitive advantage. W.W. Grainger’s competitive advantage comes from its supply chain. The company is the largest player in the highly fragmented MRO industry. This gives W.W. Grainger better proximity to its customers which results in more efficient delivery (for e-commerce), or a shorter trip for customers for in-store purchases.
The company’s size relative to the industry allows it to pursue acquisitions of small MRO players that easily fold into W.W. Grainger’s larger operations. This strategy has helped the company grow its earnings-per-share at 12.6% a year over the last decade.
The company’s growth has been slowed recently due to unfavorable economic developments. Low commodity prices have caused many of W.W. Grainger’s customers to reduce purchases, resulting in a slow down at the company. Growth will likely pick up when the oil and gas, mining, and industrial industries recover.
W.W. Grainger stock currently has a 2.1% dividend yield. This isn’t particularly high compared to other stocks, but it is high historically for W.W. Grainger. The image below shows the company’s historical dividend yield:
W.W. Grainger is currently trading for a price-to-earnings ratio of 19.4 using adjusted earnings. The company is trading at a discount to the market given that the S&P 500’s current price-to-earnings ratio is over 25.
#1: Cardinal Health
Cardinal Health (CAH) is one of the largest businesses in the generic pharmaceutical and medical supply industry. The company has a market cap of $27.66 billion. The market caps of its two largest competitors is shown below:
- McKesson (MKC) has a market cap of $43.94 billion
- AmerisourceBergen (ABC) has a market cap of $19.07 billion
Cardinal Health was founded in 1907 and is headquartered in Dublin Ohio. The company has paid increasing dividends each year for 32 consecutive years.
The company’s 32 consecutive years of dividend increases shows evidence of a strong and durable competitive advantage. Cardinal Health’s competitive advantage comes from the scale of its operations. The company serves over 100,000 health care locations daily.
In an industry with high margins, there might be room for marginal players to take a piece of Cardinal Health’s market share by cutting costs. The durability of Cardinal Health’s competitive advantage comes from ultra-thin margins in the generic pharmaceutical and medical supply industry. The company has razor thin gross margins of 5.4%. Low margins create a strong disincentive for new competition – who would have to scale significantly just to become profitable.
Cardinal Health has solid growth prospects as well. The amount of prescription people take on average in the United States continues to rise. This trend will likely only increase as the United States’ population continues to age.
Cardinal Health’s management allocates capital well. The image below shows the company’s excellent 5 year growth:
The company regularly engages in large share repurchases (in addition to dividends) while still growing the business. I expect earnings-per-share growth of around 10.5% a year going forward from Cardinal Health from share repurchases, tailwinds from an aging population, and continued organic growth.
The company currently trades for a forward price-to-earnings ratio of just 13.3. Cardinal Health also has a dividend yield of 2.2% at current prices. The company’s combination of growth, quality, and value make it a compelling choice for investors looking for attractive long-term total returns.