If you are currently retired or getting close to retirement age, building a portfolio that generates stable income is probably your primary focus right now. In our opinion, one of the best ways to generate stable income is through dividend growth investing. Thankfully, this strategy is not rocket science and it is fairly simple for anyone to implement. Ideally, you want to build a portfolio of dividend paying stocks that have a track record of increasing their dividends every year. This way, not only are you generating stable income, but you are also able to maintain the purchasing power of your dollar (as long as your dividends are at least rising at the rate of inflation).
What Is A Dividend Aristocrat?
Each year, Standard & Poor's publishes its list of Dividend Aristocrats. According to S&P:
Since 1926, dividends have contributed nearly a third of total equity return while capital gains have contributed two-thirds. Sustainable dividend income and capital appreciation potential are both important in determining total return expectations.
The S&P 500 Dividend Aristocrats is designed to measure the performance of large cap, blue chip companies within the S&P 500 that have followed a managed-dividends policy of consistently increasing dividends every year for at least 25 years.
Companies included in the S&P 500 Dividend Aristocrats come from a broad spectrum of industries. Unlike indices that focus only on high dividend yields, which are typically from the Financials and Utilities sectors, the "Dividend Aristocrats" are well diversified across all sectors.
All Dividend Aristocrats Are Not Created Equal
While we believe that the S&P's list of Dividend Aristocrats is a great place to start your search, not all Aristocrats are created equal.
That said, we ran the entire list of Dividend Aristocrats through our rating system and came up with our "All-Aristocrat" team. This team is made up of the 20 Dividend Aristocrats with the highest Parsimony Ratings. We will highlight each of these stocks over the course of a 4-part series. Below is a schedule of the entire series.
- Part 1: Honorable Mention (stocks #16-20)
- Part 2: Third Team (stocks #11-15)
- Part 3: Second Team (stocks #6-10)
- Part 4: First Team (stocks #1-5)
The All Aristocrat Team: Honorable Mention
The vast majority of the roughly 50 S&P Dividend Aristocrats rank very highly in our system, but we only picked the top 20 for our All-Aristocrat Team. This article highlights the 5 stocks that made Honorable Mention (stocks ranked #16-20). The tables below summarize some of the key data points that we analyze when ranking our dividend stocks.
#20 Walgreen Co. (WAG)
Walgreen Co. has very high Dividend Track Record (99) and Dividend Sustainability (91) ratings, driven by its 20.7% compound annual growth rate over the past 10 years. In addition, the company still has a very modest payout ratio (37%), so there is plenty of room for future dividend growth. Walgreen recently announced a 22% increase in its dividend, which represented its 37th consecutive year with a dividend increase.
#19 Illinois Tool Works (ITW)
Illinois Tool Works has grown its dividend at a steady compound annual rate of 9.9% over the past 5 years and it has delivered shareholders a total return of 27.8% over that period. Since peaking in 2007, its payout ratio has steadily declined to 29.5%, leaving room for future increases. The company also has a very strong balance sheet, with a current cash balance over $2.0 billion and a modest debt-to-EBITDA ratio of 1.43x.
#18 The Coca-Cola Company (KO)
The Coca-Cola Company has paid a quarterly dividend since 1920 and has increased dividends in each of the last 50 years. Over the past 5 years, the company has steadily grown its revenues and earnings at a compound annual rate of 11.6% and 10.4%, respectively. This has led to a stable dividend growth rate of 8.5% and a total stock return of 34.2% over that same period.
#17 The Clorox Company (CLX)
The Clorox Company has delivered shareholders a total return of 30.8% over the past 5 years driven by a compound annual dividend growth rate of 11.8%. Clorox has increased its dividend to shareholders every year since 1977. In addition, the stock has had a very modest maximum drawdown over the past 5 years of 28.4%, which has allowed investors to sleep very well at night.
#16 Target Corporation (TGT)
Target Corporation has paid a dividend to shareholders every quarter since going public in 1967, and the company has grown dividends at a compound annual rate of 20.3% over the past 5 years. This steady dividend growth rate has led to a total return of 26.4% for shareholders over that same period. Target also has a very modest payout ratio of 27.7% and we expect the company's long dividend track record to continue in the future.
If you are looking to generate stable income, dividend growth investing is a great way to accomplish this goal and any one of these dividend Aristocrats make a nice addition to your portfolio.
Please make sure to "follow" us as we continue this series and unveil the dividend stocks that made our first, second, and third "All-Aristocrat" Teams.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.