The Most Detailed Dividend Aristocrats Analysis on the Web Reveals the 11 Very Best Dividend Stocks to Invest In.
Who has the Best Dividend Yields? Which one should You Buy?
This in-depth fundamental analysis report covers the following dividend aristocrat related topics. As the report is really huge, you can click below to jump to the topic that interests you.
- What is a Dividend Aristocrat?
- Who are the Dividend Aristocrats?
- Performance of Dividend Aristocrats
- Best and Worst Dividend Aristocrats performers
- How to invest in Dividend Aristocrats
- The Top 10 Dividend Aristocrats for the next few years
- My favorite Dividend Aristocrat
Income investors are familiar with dividend stocks as they provide an interesting way to add a regular stream of cash while still being exposed to the equity markets. However, finding the best dividend-paying stocks can be a challenge and ultimately it all depends on your goals as an investor.
There are stocks that pay dividends once a year, while other stocks pay monthly dividends or most usually quarterly.
Some distribute most of their earnings, others not so much. There are dividend stocks for every taste but there are some common concerns shared by dividend investors.
When a company announces a regular distribution of its earnings, it’s assuming a serious commitment towards shareholders. Both companies and investors are aware of what breaking this commitment signals the markets. So the primary concern is whether the firm will be able to sustain that commitment in the long-term.
Because there are so many dividend stocks and provided the stability of the dividend, investors needed to consider additional criteria to sort the best firms. Thus it became relevant to consider the company’s ability to grow its distributions. This can help the company maintain its attractiveness by preventing its dividend yield to fall as share prices rise. It can also avoid that cash distributions lose value over time due to inflation.
With that in mind were created different classes of dividend stocks with interesting designations.
Most of these groups are selected using different thresholds for the length of the company’s track record in terms of dividend growth. In other words, most of these classes comprise stocks of companies that were able to increase their dividends every year for a specified period of time. For example, Dividend Champions include the companies that were able to grow their dividends for at least 25 years, while the same feat for at least 50 years earns the title of Dividend King.
So what is a Dividend Aristocrat? Dividend Aristocrats are Dividend Champions that belong to the S&P 500 Index, which translates into an additional filter for size and liquidity.
Dividend Aristocrats Index vs S&P 500 Index
An interesting thing about the Dividend Aristocrats is that they are represented by the S&P 500 Dividend Aristocrats Index (better known as “Dividend Aristocrats Index”) which in turn is tracked by ETF ProShares S&P 500 Dividend Aristocrats (BATS: NOBL). This makes it easier to evaluate the performance of the Dividend Aristocrats list of stocks as well as investing in all of them without incurring in all the transactions costs.
There are other Dividend Aristocrats ETFs but this is the one with the least tracking error and at 0.35% expense ratio, it’s pretty cheap.
In the last 10 years the Dividend Aristocrats Index delivered a total return of about 250% (CAGR 10Y = 13%) while the S&P 500 Index grew 175% (CAGR 10Y = 11%) in the same period. That’s a total of 75 p.p. in 10 years or 2 p.p. each year, but that doesn’t mean the Aristocrats are consistent over performers.
Table 1 below details the current Dividend Aristocrats
|Ticker||Company Name||Years of Annual Dividend Increases|
|ADM||Archer Daniels Midland||42|
|ADP||Automatic Data Proc.||43|
|AOS||A.O. Smith Corp.||25|
|APD||Air Products & Chem.||35|
|BDX||Becton Dickinson & Co.||46|
|BF-B||Brown-Forman Class B||34|
|CAH||Cardinal Health Inc.||30|
|FRT||Federal Realty Inv. Trust||50|
|GPC||Genuine Parts Co.||61|
|GWW||W.W. Grainger Inc.||46|
|HRL||Hormel Foods Corp.||52|
|ITW||Illinois Tool Works||43|
|JNJ||Johnson & Johnson||55|
|LEG||Leggett & Platt Inc.||46|
|MKC||McCormick & Co.||32|
|PG||Procter & Gamble Co.||61|
|PPG||PPG Industries Inc.||46|
|ROP||Roper Technologies Inc.||25|
|SPGI||S&P Global Inc.||44|
|SWK||Stanley Black & Decker||50|
|TROW||T. Rowe Price Group||31|
|WBA||Walgreens Boots Alliance Inc.||42|
|WMT||Wal-Mart Stores Inc.||44|
The Dividend Aristocrats 2018 list currently comprises 53 stocks. In order to know them a little better, let’s try some segmentation.
The Dividend Aristocrats list includes a diversified group of stocks in terms of business sector, although it’s clear there’s a tilt towards the more defensive sectors of the current economy. It’s also interesting to see that when we sort the Dividend Aristocrats by yield the least represented sectors like the Utilities and Technology sectors (only 3 Aristocrats) have the highest dividend yields.
The group includes a majority of large companies as one would expect both from being in the S&P 500 Index and being able to raise distributions for over 25 years. On the right, we see that most companies grow their dividends at an average growth rate below 10% per year but there are still over 20 stocks recording dividend growth above that.
You can invest in Dividend Aristocrat Stocks by simply buying any of them on the open stock exchange, or buy all of them using an Exchange Traded Fund. The ETF ProShares S&P 500 Dividend Aristocrats (BATS: NOBL). This makes it easier to reap the income from them all without incurring in all the transactions costs. There are other Dividend Aristocrats ETFs but this is the one with the least tracking error and at 0.35% expense ratio, it’s pretty cheap.
If you’re a dividend investor considering investing in these stocks then at this point you already know how many dividend aristocrats there are and realized this is a very heterogeneous group despite the good historical performance the last decade.
Below is a table of the top 10 best and worst Dividend Aristocrats sorted by compounded annual return generated in the last 5 years.
Dividend Aristocrats’ performances in the last five years have been quite different. The 10 best performers recorded an average of 23%/year compared to the 2%/year from the worst performers.
The question now is if we can associate the performance with the companies’ attributes.
Interestingly 8 out of 10 of the best performers have a market capitalization between $20 and $80 billion while only one of the worst performers fall in that range. In fact, worst performers seem to be either smaller or much bigger.
When extending the analysis to the whole Dividend Aristocrats list we arrive at a similar conclusion. Stocks with market caps between $20 and $150 billion recorded an average total return of 14.2% outperforming the others by more than 7 percentage points. Apparently, size matters.
This chart represents the distribution of Dividend Aristocrats by yield and shows a clear distinction between the dividend yields offered by the stocks which performed better compared to the worst performers. It indicates that best performers offer a lower dividend yield, typically below 2%, while worst performers offer a more enticing yield averaging 3.3%.
The thing is dividend yields are affected by share price appreciation, so sorting the Dividend Aristocrats by total return (which includes share price appreciation) will almost inevitably cause this polarization of dividend yields. However, if we consider dividend growth instead, we come to the conclusion that best performers increased their dividends at a faster pace (average CAGR 14%) than worst performers (average CAGR 8%). These results are consistent when we consider the 53 stocks in the Dividend Aristocrats list, which means dividend growth is also relevant to assess their performance.
Again we find a clear division. There seems to be a strong relationship between performance measured as total return and revenue growth. 90% of best performers recorded an average growth of revenue above 5%/year. Best performers averaged 7%/year in the last 5 years compared to a decrease of 1%/year from the worst performers. It makes sense that a growing business translates into better stock price performance and better dividend quality. When considering all stocks in the Dividend Aristocrats 2018 list, these conclusions are still valid, although it appears that for revenue growth rates above 5%/year, total return performance remains unchanged.
Instead of the commonly used payout ratio which considers the part of earnings that is distributed as dividends, it seems more accurate to use the free cash flow payout ratio because dividends are cash distributions. Intuitively you’d think that having a smaller part of free cash flow being distributed means the company has a lot of space to grow dividends so you’d expect those to be the best performers. However, 4 of the 10 worst performers also present a ratio below 50%. This means that although best performers have a lower payout ratio on average (32%) compared to the worst performers (55%), a low FCF payout is insufficient to assess total performance.
Extending the analysis to the rest of the Dividends Aristocrats list or using the regular earnings payout ratio leads to the same results.
In summary, this analysis established a relationship between total return of Dividend Aristocrats 2018 stocks and their size, dividend growth, revenue growth and payout ratio over the last five years. Nevertheless, bear in mind that this is all based on past events. Predicting future total return by gathering hints on the future performance of these attributes seems to me as the best answer to the question “How to invest in Dividend Aristocrats?”.
The following companies are selected from the Dividend Aristocrats list in 2018 based on my understanding of their financial stability, growth prospects and industry overview for the next few years. They are sorted by no particular order of preference.
Lowes Companies (NYSE: LOW)
- Market Cap: 79.5B
- Dividend Growth (CAGR 5Y): 21%
- Revenue Growth (CAGR 5Y): 6%
- FCF Payout Ratio: 34%
According to statista.com home improvement retail is expected to grow at an average rate of just above 4%/year until 2021 to a total of $443 billion. This will be driven by professional customers and online sales. With the current uptrend in consumer confidence and house prices, I think this will be a top performer industry and Lowes is poised to seize the opportunity.
Lowe’s is the second largest home improvement retailer in the world. It operates over 1,800 stores in Canada, United States and Mexico and employs over 300,000 people. It tries to differentiate itself by providing a pleasant buying experience to customers through a seamless merger of its sales channels (physical stores and online) into the so called omnichannel.
Its investment to enhance the online shopping experience is paying off as the company reported 34% and 20% growth in online sales in 2017 and the first quarter of 2018, respectively.
The firm has also made some acquisitions to strengthen their relationships with professional customers. It bought Maintenance Supply Headquarters, a leading distributor of maintenance, repair and operations products in 2017 and Central Wholesalers in 2016.
Currently, the company is facing a management restructure as former Chief Executive Officer Robert Niblock was replaced by Marvin Ellison (J.C. Penney CEO). It remains to see what will come of this change but the company’s guidance for the year include 5% sales growth and over 30% EPS increase.
Cintas Corporation (NYSE: CTAS)
- Market Cap: 22.5B
- Dividend Growth (CAGR 5Y): 20%
- Revenue Growth (CAGR 5Y): 9%
- FCF Payout Ratio: 25%
Cintas operates a simple yet very profitable business. It provides businesses with a wide range of products and services but is most acknowledge by their uniform rental programs among other facility services.
The company has a large and diversified customer portfolio of over 1 million businesses, none of them accounting for more than 1% of total revenues. Still, management believes there’s plenty of room to grow both by increasing market share and improving penetration rates in their current customers.
In 2017 Cintas completed a major acquisition of the 4th largest public player in the industry, G&K Services. The operation adds almost $1B in revenue and brings a lot of value in synergies.
The company has just reported 4th quarter and yearly results and it ended the period on a strong note beating management’s fourth-quarter sales and earnings targets. Uniform rental revenue jumped 10% and profit margins improved across the board. The company’s guidance for the next year represents about 5% revenue growth and an increase in EPS of about 20%.
Roper Technologies (NYSE: ROP)
- Market Cap: 30.6B
- Dividend Growth (CAGR 5Y): 20%
- Revenue Growth (CAGR 5Y): 9%
- FCF Payout Ratio: 13%
Roper is a diversified technology company that develops software and other solutions for a variety of niche end markets. It operates a very cash-driven business model, meaning their asset-light business allows them to generate a tremendous amount of cash. In 2017 free cash flow amounted to 25% of revenue.
70% of their revenue comes from radio frequency identification (“RFID”) technology solutions (40%) and from offering software and products for medical applications and digital imaging products (30%). The remaining 30% is divided between industrial technologies and energy systems.
According to IDTechEx, RFID technology is expected to reach almost $15 billion in market value by 2022, growing over 30% against 2017’s value.
By the end of 2017 the company recorded growth in revenue, net earnings, EBITDA, and cash flow, all over 20% with improved profitability. More recently, after recording another strong quarter with double-digit growth, Roper increased its full-year guidance for the second time.
O. Smith (NYSE: AOS)
- Market Cap: 10.1B
- Dividend Growth (CAGR 5Y): 25%
- Revenue Growth (CAGR 5Y): 9%
- FCF Payout Ratio: 38%
O. Smith manufactures gas and electric water heaters and boilers for both commercial and residential lines. What I like in this story is that the company has a lot of paths to grow from.
It recently acquired Aquasana (2016) and Hague (2017) thus entering the water treatment market. These acquisitions help to round out their water treatment product line in North America and increase global exposure in Russia and China. Over 30% of their revenue is coming from China which just last year grew 16%, led principally by higher volumes of water treatment and air purification products. It also built a new water treatment plant in Nanjing, which was expected to be complete and in production during the second quarter of this year.
Second quarter results were very strong, with sales from both North America and Rest of the World segments recording double-digit gains compared to the same quarter in 2017. For the rest of the year, the company is expecting 10% and 20% growth in revenue and earnings per share, respectively.
It’s also worth mentioning that A. O. Smith has expanded its reach by entering the retail channel through Lowe’s stores in North America.
The Sherwin-Williams Company (NYSE: SHW)
- Market Cap: 41.0B
- Dividend Growth (CAGR 5Y): 17%
- Revenue Growth (CAGR 5Y): 10%
- FCF Payout Ratio: 24%
The Sherwin-Williams is a global manufacturer and distributor of paint, coatings and related products to professional, industrial, commercial and retail customers. This is a story of a very disciplined company in a mature, slow-growth industry that is facing some good prospects for the coming years.
Industry-wise, there are some factors contributing to favorable prospects. These include:
- Growth in new construction in the U.S., but especially in Brazil and Mexico;
- Increasing home values and strong remodeling activity;
- Rising global consumer and manufacturing confidence;
As the largest operator of specialty paint stores, serving architectural, industrial painting contractors and do-it-yourself (DIY) homeowners, I’d say SHW is uniquely positioned to take advantage of the opportunities.
In mid-2017, the company completed the acquisition of Valspar thus becoming the world’s largest painting and coatings enterprise. Management announced the integration is going better and faster than previously anticipated and estimated savings from the operation can reach $1 billion by 2020.
For the combined company, the expectations until 2020 are the following:
- Sales growth at a compounded annual rate of 4 to 6%,
- EBITDA margin expansion to 18.8 to 21% (2017: 15.2%),
- Adjusted free cash flow increase to 10 to 10.5% of net sales (2017: 9%),
- Diluted EPS growth at a compounded annual rate of 9 to 12%.
There’s a growing pressure on gross margins, caused by raw materials (mostly oil derivatives) inflation, but so far in 2018, the company was able to report 35% growth in sales and 16% in diluted EPS and also raised full year guidance.
The Clorox Company (NYSE: CLX)
Market Cap: 18.9B
Dividend Growth (CAGR 5Y): 6%
Revenue Growth (CAGR 5Y): 2%
FCF Payout Ratio: 58%
Clorox is an underestimated business when it comes to growth prospects. Truth be told, there aren’t high growth rates to be expected in the near future. In fact, the company is pointing to a 3 – 5% revenue growth, EBIT margin expansion from 25 to 50 basis points and free cash flow to be between 11 and 13% of net sales up to 2020. This alone reflects a very solid business focusing its resources on profitability and cash conversion but there’s more to it.
Clorox is a well-known global manufacturer of a wide range of consumer and professional products related to cleaning, household, and lifestyle. Examples include bleach products, cat litter, dietary supplements and water filtrations systems among many others. Most of these products are marketed under leading, top-of-mind brands.
What caught my attention despite the rather low growth rates was the strategic acquisition of Nutranext in April on top of the previous acquisition of RenewLife in 2016. These operations reflect Clorox’s intention to focus on health and wellness, a growing industry in the developed world.
There are still some margin concerns due to logistic costs’ inflation, but the company is partially reflecting that to customers, a common move among other players like Procter & Gamble, and investing in cost-saving and productivity initiatives.
Ecolab Inc. (NYSE: ECL)
- Market Cap: 42.6B
- Dividend Growth (CAGR 5Y): 13%
- Revenue Growth (CAGR 5Y): 3%
- FCF Payout Ratio: 58%
“Ecolab Inc. is the global leader in water, hygiene and energy technologies and services that protect people and vital resources.” – Ecolab Annual Report.
Ecolab operates in several business segments, all of which contribute to a better future. It provides comprehensive solutions, expertise and on-site service to promote safety in food processing, sanitized environments, and optimize water and energy consumption.
We’ve never been so aware of the importance of making businesses sustainable and of minimizing our global ecological footprint. It’s undeniable that as the world population grows, so grow concerns about depleting available natural resources. The implications of this put Ecolab in the right place to take advantage.
Current demographic trends imply increasing healthcare needs, more food processing and increased demand for clean water and energy. To be able to provide for the future needs, businesses need to be more efficient in their usage of natural resources. That’s where Ecolab comes in.
Contrary to some other businesses, food, water, energy and healthcare tend to be less sensitive to the economic cycles which make Ecolab operate in a relatively stable market.
On top of that, this is primarily a service business with low capital expenditure requirements and management’s major concern regarding capital deployment is to increase dividends in line with earnings growth.
More recently, the company announced strong second-quarter results with revenue growth in all segments and 20% increase in EPS compared to the same period last year. These results were driven from new products with increased prices showing innovation to be a key driver of the industry. It also announced a major efficiency initiative set to save $200 million in selling, general and administrative expenses by 2021.
Becton, Dickinson and Company (NYSE: BDX)
- Market Cap: 67.6B
- Dividend Growth (CAGR 5Y): 10%
- Revenue Growth (CAGR 5Y): 9%
- FCF Payout Ratio: 37%
Becton, Dickinson and Co. manufactures and markets healthcare supplies, devices and equipment. It operates two major business segments. The Medical segment (60% of revenue includes syringes, needles, catheters, surgical instruments and others related to the improvement of healthcare delivery. The Life Sciences segment is more focused on instruments for diagnostics specimens, detection of infectious diseases and tools for the study of cells in disease processes. All that summarized:
“We help the people who help the patients” – Vincent Forlenza, CEO.
Healthcare is taking a huge part in Governments’ budgets around the world and there’s still so much work to do regarding diagnostics, medication and overall healthcare assistance. Just recently, a John Hopkins study points out “medical errors” as the third-leading cause of death in the U.S.
Diabetes, which is a particularly important topic for the company, is expected to reach 600 million people by 2040, according to the International Diabetes Federation, costing more than $1 trillion.
Also, experts believe cell study will greatly improve the way we understand and treat diseases. For all this, I believe BDX will have plenty of opportunities to continue to deliver solid results.
In terms of execution, I have to say the company is generating huge amounts of cash. In the last five years, BDX has an average rate of earnings conversion into free cash flow of 150%.
More recently, attention is on two major topics:
- Integration of last two acquisitions: Bard in 2017 and CareFusion in 2015. These two deals have turned BDX into one of the five largest medical technology companies in the world. Bard, in particular, has a very complementary offering to Becton’s and has reported solid growth in all areas of business. So far the company is reporting excellent results in executing the integration of both companies and as a consequence, it raised full-year guidance.
- Emerging markets’ revenue, especially from China is showing good momentum and it’s still scratching the surface. In its latest quarter revenue from China grew 10% and management expects international sales to keep driving growth.
Walgreens Boots Alliance (NYSE: WBA)
- Market Cap: 68.2B
- Dividend Growth (CAGR 5Y): 10%
- Revenue Growth (CAGR 5Y): 11%
- FCF Payout Ratio: 29%
Walgreens Boots Alliance is the largest retail pharmacy in the U.S. and Europe. It is a global leader in pharmacy-led, health and wellbeing retail operating over 13,200 stores in 11 countries and owns one of the largest global pharmaceutical wholesale and distribution networks, with over 390 distribution centers delivering to more than 20 countries. Additionally, Walgreens is one of the world’s largest purchasers of prescription drugs and many other health and wellbeing products.
Over 70% of sales origin from the U.S of which almost 70% come from prescription drugs and pharmacy-related services.
There are multiple factors I believe will drive this industry, some of which I’ve mentioned already:
- Increases in life expectancy leading to aging populations,
- Increases in the availability of generic drugs,
- Increased number of people with insurance coverage,
- Continued development of new drugs that improve quality of life.
Last year, Walgreens acquired from Rite Aid 1,932 stores, three distribution centers and related inventory for $4.375 billion in cash and other consideration. The operation significantly increases its growth potential. Also, the healthcare retailer announced a ten-year pharmaceutical distribution agreement with AmerisourceBergen focused on streamlining the distribution of prescription drug products. I think these operations have solidified Walgreens position in the industry.
In its most recent quarter, the company recorded 14% growth in sales and 15% in adjusted EPS. Growth mainly driven from Rite Aid acquisition, as expected. Quarterly dividend was increased 10% and guidance for the full year was revised upwards. However good it sounds, there’s an elephant in the room and its name is Amazon. The online retailer bought PillPack, an online pharmacy in a deal that could come to disrupt the drugstore industry.
Stanley Black & Decker, Inc. (NYSE: SWK)
- Market Cap: 236.5B
- Dividend Growth (CAGR 5Y): 2%
- Revenue Growth (CAGR 5Y): 5%
- FCF Payout Ratio: 37%
This company is one of the oldest, if not the oldest in the Dividend Aristocrats list. It was founded 175 years ago. Stanley Black & Decker is a diversified global provider of all kinds of hand tools, power tools, automatic doors, equipment for oil & gas, electronic monitoring systems, and a lot more.
It is currently operating under three business segments – Tools & Storage (70% of revenue), Industrial (15% of revenue) and Security (15% of revenue).
What I like about this company is that it has a very well structured plan for the future and every year you can see how the pieces fit together to achieve its long-term goals. The group has announced its 22/22 vision, under which it intends to achieve $22 billion in revenue by 2022. To do so, the company expects to achieve 10 to 12% total revenue and EPS growth (half of which supported by acquisitions) and 100% conversion of net income to free cash flow, half of which will be deployed into inorganic growth and the other half returned to shareholders.
Organically the company is driving growth through innovation by launching new products, and commercial efforts, especially in emerging markets where the company wants to increase its exposure.
The most significant acquisitions the company has made recently include:
- Newell Tools in 2017, in which the company expects to achieve $80–$90 million in cost synergies,
- Nelson Fastener Systems set to expand its portfolio of highly engineered fastening solutions, and also deliver cost synergies,
- Craftsman brand from Sears Holdings, providing SWK the rights to develop, manufacture and sell Craftsman-branded products in non-Sears Holdings channels.
Recently there have been some concerns about rising raw material costs, including steel and aluminum. Additionally, a settlement with the Environmental Protective Agency forced the company to lower its full-year EPS guidance, but the fundamentals are all there for a bright long-term future.
While all of the previous stocks are in my opinion great Dividend Aristocrats, it’s finally time to reveal my absolute favorite ruler.
S&P Global Inc. (NYSE: SPGI)
- Market Cap: 50.7B
- Dividend Growth (CAGR 5Y): 10%
- Revenue Growth (CAGR 5Y): 7%
- FCF Payout Ratio: 23%
As long as there are financial markets, S&P Global will also exist. The company operates three business segments related to the financial industry. Under the “Ratings” unit, the company provides benchmarks, ratings and all types of analytics that help investors around the world take decisions about fixed income investments. It supplies finance professionals with market data and research through proprietary software platforms as part of their “Market and Commodities Intelligence” business. And it also makes business from its well-known indices which are benchmarks used by investment vehicles like ETFs and derivatives.
You might think that this business is quite cyclical and unpredictable being related to financial markets and its cycles, and you’re not entirely wrong to think that. However, SPGI’s business model allowed the company to navigate smoothly through the market swings and record revenue growth for the entire last decade.
The company is committed to driving growth through innovation, developing new ways to provide information and create new insights for its customers. This year’s acquisition of Kensho Technologies and RateWatch help the company leverage cutting-edge technology to expand the company’s offering and deepens its relationships with financial decision makers.
It’s also worth mentioning the company has been growing its free cash flow every year at a compounded annual growth rate of over 20% for the last five years and even though dividend growth has been accelerating (9%, 14% and 22% growth in 2016, 2017 and 2018 respectively), FCF payout has dropped to half since 2013.
In its most recent quarter the company reported strength across the board with revenue and EPS growth of 7% and 12%, respectively.
Dividend Aristocrat Analysis Wrap Up.
So let us know what you think in the comments below. Which Aristocrat will you buy?
Sources Used in this Article:
Some Data in this article was sourced by these excellent Dividend Service Providers.
- https://www.simplysafedividends.com/ Dividend Management Service
- https://www.dividendgrowthinvestor.com/ Dividend Newsletter Service
- https://finviz.com/ Financial Visualizations
- https://www.tiingo.com – Financial Analytics