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: First Team
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 our First Team (stocks ranked #1-5). Some of these stocks may surprise you a bit (given that none of them have a dividend yield over 3.0%). However, yield should not be the only factor you look at when analyzing a long-term investment for your retirement portfolio. The tables below summarize some of the key data points that we analyze when ranking our dividend stocks.
#5 W.W. Grainger, Inc. (GWW)
W.W. Grainger has our highest possible rating of "99" for Dividend Track Record. The company has increased its dividend for 40 consecutive years, including a 15.2% compound annual growth rate over the past 10 years. GWW also has high ratings for Financial Stability (95) and Dividend Sustainability (79) and the company has grown earnings at a compound annual rate of almost 15% since 2006. It's no wonder that the company has delivered shareholders a total return of 179% over that same period.
#4 Wal-Mart Stores Inc. (WMT)
Wal-Mart is one of the best dividend growth stocks of all-time (in our opinion) and it has delivered shareholders a 62% total return over the past five years. In addition, the company has increased its dividend at a compound annual rate of 13.5% over that period. Also, the company still has a very modest payout ratio of 31.9%, so it has plenty of room to continue to increase its dividend in the future.
#3 McCormick & Company (MKC)
Despite a current dividend yield of only 2.1%, McCormick & Company is definitely a stock to consider for your DIY Dividend Portfolio. The company recently increased its dividend for 2013, which was the 27th consecutive year that the company has increased its quarterly dividend. Over the past 5 years, MKC shareholders have enjoyed a 93% total return, including a 9.2% compound annual dividend growth rate over that same period.
#2 Hormel Foods Corp. (HRL)
Hormel Foods carries our highest rating for Dividend Track Record (99). HRL recently announced its 47th consecutive annual dividend increase, raising its annual dividend to $0.68 from $0.60 (a 13.3% increase). Over the past 5 years, the company has delivered shareholders a 75% total return, and it has increased its dividend at a compound annual rate of 14.4% over that period. Like Wal-Mart, the company also has a very modest payout ratio of 30.3%, so it has plenty of room to continue to increase its dividend in the future.
#1 V.F. Corporation (VFC)
V.F. Corp. is one of only two stocks in our entire universe that has a rating above 80 in all five sub-categories. So it's no wonder that VFC carries our highest overall rating of "99." The company recently announced a quarterly dividend increase of 21%, which marked the 40th consecutive year of higher dividend payments to shareholders. Despite VFC's modest current dividend yield of 2.4%, the company has delivered shareholders a whopping 147% total return over the past five years.
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.
Disclosure: I am long WMT.