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.
Aristocrats Yielding Over 3.0%
We recently 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.
Many of the stocks on our "All-Aristocrat" team have dividend yields under 3.0%, which is a key target threshold for many dividend investors. While we believe that there is more to dividend investing than yield itself, we understand that many retirees have a minimum 3.0% yield hurdle for their retirement portfolios.
That said, we started a new 3-part series last week that highlights our top 12 Dividend Aristocrats that have dividend yields over the magic number of 3.0%. We broke this list down into gold, silver and bronze rankings (note that the gold medal winners are the stocks with the highest Parsimony rating):
Gold Medal Winners
The vast majority of the roughly 50 S&P Dividend Aristocrats rank very highly in our system, but we only picked the top 12 3%-yielders for the Core Retirement Portfolio list. This article highlights the 5 stocks that received Gold medals (stocks ranked #1-4). The tables below summarize some of the key data points that we analyze when ranking our dividend stocks.
#4 Kimberly-Clark Corp (KMB)
Kimberly-Clark has a nice current dividend yield (3.4%) and a very respectable 5- and 10-year dividend growth rate of 7.0% and 9.5%, respectively. The stock has also been on fire the past 12 months, with a total return of 22%.
#3 Automatic Data Processing (ADP)
In November, Automatic Data Processing increased its annual dividend rate by 10%. This increase marks the 38th consecutive year in which the company has raised its dividend. Over the past 10 years, ADP has grown its dividend at a compound annual rate of 13.1%. In addition, the company has a very high Financial Stability rating (93) and a strong balance sheet (with very little debt on its books).
#2 Leggett & Platt (LEG)
Leggett & Platt has increased its annual dividend for 41 consecutive years, at a 13% compound average growth rate. Only 11 members of the S&P 500 have a longer string of consecutive annual dividend increases. The company has delivered shareholders a total return of 131% over the last five years and it currently pays one of the highest dividends (4.1%) in our top 12.
#1 McDonald's Corp (MCD)
McDonald's carries one of our highest possible ratings for Dividend Track Record (98) and we believe that it is a great long-term stock for a DIY Dividend Portfolio. MCD has produced a very respectable 5-year total return of 106%, with a very conservative maximum drawdown of 21%. Even more impressive is the fact that the company has increased its dividend at a compound annual rate of 28% over the past 10 years! MCD is probably one of the best dividend growth stocks of all time.
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 retirement portfolio.
Disclosure: I am long MCD.