Dividend Aristocrats: 3 to Watch

Stock markets are having one of their best years in history. Most averages are up over 50% from their lows in March. As usual, the gains have not been spread around equally. Some of the Dividend Aristocrats have been left behind and represent superior opportunities for value investors.

Dividend Aristocrats are companies in the S&P 500 which have minimum track records of 25 consecutive annual increases for their dividends. However, this elite group has shrunk in the last year. All banks are being removed after dividend cuts. This year, General Electric (GE), Pfizer (PFE) and Masco (MAS) have cut dividends which will take them off the list by next year. But those remaining in the group represent excellent values, many have been left behind in the market surge this year. These were the kind of stocks recommended by top analysts when the markets were at their lows (so much for listening to the "experts" for investment advice) last March. Now many of these companies represent good values.

Eli Lilly (LLY) is a stock I have owned for many years. The last decade was an excellent period for their stock but followed by a terrible time in this decade. Early in this decade the stock was over 100, today it has fallen to 35. Meanwhile their dividend has consistently been raised. Next year's increase should be announced early in 2010 which could take it over $2. At the beginning of this decade, its Prozac lost patent protection but Lilly went forward. Zyprexa, its top selling drug today, will lose patent protection in a few years. However, they've acquired ImClone (IMCL) to become a bio tech and cancer powerhouse. They have many drugs working their way through the pipeline. EPS is forecasted at $4.30 this year and is expected to rise to $4.65 next year. Selling near their low price in this decade, with a 6% yield and a long time Dividend Aristocrat should make Lilly an investment candidate for value investors.

Exxon Mobil (XOM), a Dow stock and new Dividend Aristocrat, is the largest oil company in the world. It's made up of Exxon and Mobil, the two largest companies spun off after Standard Oil was broken up in 1911. The stock has roughly doubled in the this decade, but has not performed well in recent years. The price of 73 is where it was 3 years ago. Their successful 100 year track record along with prospects for future growth should make Exxon a good investment for the long run. EPS is depressed this year after the large decline in oil prices, but next year Exxon is forecasted to earn $5.87. The $1.68 dividend is well covered.

Wal-Mart (WMT), another Dow stock, is one more company so large that everybody knows their business. The stock has been flat in the last decade, trading in the 45-60 zone. Their growth keeps Wal-Mart moving forward allowing them to raise dividends yearly. Growth from expanding their chain of stores, especially in China, should enable them to keep increasing dividends. The stock trades at 52 with a $1.09 dividend. Earnings are forecasted at $3.59 in 2009 and $3.90 next year.

These are just three Dividend Aristocrats. The remainder generally have excellent tracks records which have let them continue increasing dividends even through the credit crises. Dividend Aristocrats deserve more attention for value investors.

Disclosure: Long LLY

Comments

[gmwright:]

Personally I like BP more than XOM for a dividend play in oil. Somewhat similar to WMT, XOM is so huge, further growth on a meaningful scale becomes difficult. No doubt they are a cash cow, but so are most oil companies. BP is not much different, has increased its dividend every year since 1999 and sports a 6% yield.

The only concern is the margins are lower than some of the other oil plays like CVX or XOM, but I am encouraged with BPs recent success in Africa.

Oct 21 05:25 AM

[Daniel Mark...:]

Eli Lilly has been around for a century,and a proven performer.I am waiting to see how they resolve the costly Zyprexa saga.

Great news that Eli Lilly is posting profit,as a Zyprexa damage claimant who got diabetes from it I know that Lilly can afford to pay me my settlement.

Oct 21 06:05 AM

[mbkelly75:]

My Core Portfolio is entirely made up of stocks that have been paying a rising dividend for 5+ years. History has shown that these are the best stocks to own over the long-term in any type of market - bull or bear - during inflationary periods or deflationary periods. The Aristocrats (and a couple of other similar lists) are a fine starting point. Here is a list that takes out the duplicates from those lists and is updated more frequently:
dividendsvalue.com/ana.../
It is MUCH easier to look for a good investment from a list of 85 or so stocks than from the 5500 or so in the entire market. Not all of these stocks will be good stocks at any given time - but if there is a good buy currently from a dividend-paying stock - it will be on this list somewhere. ANY time you can find one of these stocks undervalued by the market - you have done well.

Oct 21 08:33 AM

[David Van K...:]

You are correct to point out that the Dividend Aristocrat list can be misleading in that it can contain stocks that have recently cut their dividend. S&P only updates the list once per year (in December).

Also, the qualifications for making the list include that it must be an American company and have a record of at least 25 consecutive years of dividend increases. That's why you won't find a foreign company such as BP on the list.

The Aristocrat list has no minimum yield requirement, so if you have a personal minimum yield requirement, you must research behind the list. I require a minimum of 2.5% for stocks with a long track record of dividend increases, so XOM (2.3%) and WMT (2.1%) would not meet my initial requirements.

Oct 21 08:38 AM

[SLW:]

I, too, have some minimum yield requirements (3.5%, generally) but like the growth prospects of many of the Aristocrats which don't have a yield that high, which is the normal and logical trade-off. To capture exposure to the lower yielding Aristocrats but maintain higher cash flow, I have been making smaller purchases of BDV and BDJ which are Blackrock closed-end funds focused on "Dividend Achievers" which are mostly Aristocrats with a long record of raising dividends. They are managed funds and BDJ is "enhanced" with buy-write activities. And they have managed distribution policies so normal caveats to current yield do apply. BDV is currently selling at a near 7% discount to NAV and paying a near 7% yield on current MV.

Switching subject a little, I am surprised that VZ and ATT aren't mentioned as high value propositions in the Aristocrat group.

Not for everbody, perhaps, but another way to approach it.

Oct 21 11:12 AM

[U338129:]

I agree with your % mindset. To me, WMT can hardly be considered a "dividend aristocrat" when it only yields a pathetic 2%. People can talk about WMT growth potential and the use of retained earnings all they want. However, buying KO/PEP/PG/JNJ over the last year would have provided you with 4-3% yields (and still would) and those companies provide roughly the same growth opportunities as WMT does.

I own WMT because I bought it cheap and I consider it a "safe" investment for now (who knows where retail will be 10-20 years from now); but, you'd never hear me say it was a dividend aristocrat. I think the dividend is pathetic given the amount of cash and cash flow WMT has at its disposal. I believe shareholders deserve better (especially after the flat performance we have experienced lately).


On Oct 21 08:38 AM David Van Knapp wrote:

> You are correct to point out that the Dividend Aristocrat list can
> be misleading in that it can contain stocks that have recently cut
> their dividend. S&P only updates the list once per year (in December).
>
>
> Also, the qualifications for making the list include that it must
> be an American company and have a record of at least 25 consecutive
> years of dividend increases. That's why you won't find a foreign
> company such as BP on the list.
>
> The Aristocrat list has no minimum yield requirement, so if you have
> a personal minimum yield requirement, you must research behind the
> list. I require a minimum of 2.5% for stocks with a long track record
> of dividend increases, so XOM (2.3%) and WMT (2.1%) would not meet
> my initial requirements.

Oct 21 03:43 PM

[U338129:]

That's why it's down $1.295 a share as I respond to you. Rally...right.


On Oct 21 03:41 PM BernankeBeagle wrote:

> up we go. nothing can stop this rally but God himself
>
> good articles: tiny.cc/financenews

Oct 21 03:44 PM

[Dividend Gr...:]

I would substitute XOM for CVX or some other of the big oil majors ( I own CVX, not XOM). The mere fact that XOM doesn't pay most of the funds to shareholders as dividends, but as stock repurchases ( which I view similarly to special dividends) is because they probably are not confident enough that their future earnings would sustain a higher dividend payment in the future..

As for WMT, I think that even if the company stops expanding so rapidly, they would keep raising the dividend payment. The main issue of course is whether you want to own "any" retailer or whether you want to own THE BEST retailer at the moment. Do not forget capital gains as well. Despite the fact that WMT has paid a small dividend yield over the past decade, the total return is still better than S&P 500...

As for LLY, i am thinking of purchasing the stock some time next year.. The problem with big pharma stocks is that most of their drugs could face patent expirations in a few years, while major blockbuster discoveries are expensive and tough to uncover..

Oct 21 04:39 PM

[Joseph Sherman:]

Avi Morris explains that "Dividend Aristocrats are companies in the S&P 500 which have minimum track records of 25 consecutive annual increases for their dividends." He has a good article, and I would like to see an international profile of Dividend Aristocrats from European and Asian stock markets.

Oct 22 12:25 AM

[Delojozafado:]

As other posters posted, I have BP in my portfolio. STO has the best Beta, off a drop in oil & priced in a hard currency so rising oil gives leverage. I am out of it now as I am also out of UCO. I added to MTP today at $14.03. IRR,ENY,AMJ.KYE,REP-A, along with ENDTF, PGMYF and DAYFF round out my energy patch. I sold my MMR-M today on valuation issues. One of the best dividend plays left in CEFs is the NGZ global convert fund. It does not dip too often and when it does like it did today I add. NGZ with a more recently hard to find discount to NAV of -5.5%. KYE now over 10% premium but for total return mostly worth it. I used the BDJ back in the year end rally and it is good in a rising market. I also have added to my BCF as of late with it's strong met coal positions as well as the iron ores and other base metals. In health care I would go back into HSP Hospira medical delivery. Sold it on valuation but any significant market pull back would be a chance to get back in it. The HCN-G ,is a little late to the party as the time to buy it was when it was first announced that it (HCN) would replace Sovereign Bank (taken out of a near collapse by B Santander) in the S&P 500. I am an owner of VZ for the dividend and also own the IPS~ OTT, and BLIAF. I am looking at a chance to grab some RFMD off the disappointing Nokia numbers, lots of cell phone diseased customers of Apple, RIMM, and the rest of the chic fashion accessory "bugs". They will starve their children before giving up these permanent appendages. They have no clue that there is anything wrong with their brains when their phone starts to ring while we are praying at the side of a grave where some of us, are paying our last respects to a loved one. We are sorry to lose such good customers when they win their Darwin awards meeting up with a 40 year old oaks or a Honey wagon when the phone drops on the floor of their car. There is however an inexhaustible supply of 9-12 year olds always coming up behind to replace the lost business. There are some very good yields to be had in the shorter Med term bond market funds. Of course dilution issues with funds but then diversification too. Who knew so many A or better rated individual bond issuances like WAmu would just default! You can get an awful good yield without the qualified dividend tax break in a string of beads of TIP,WIA,GYB,CUI,LQD,MI... JGT,ESD, FAX and IAE. There are besides the NGZ some great convrts AES-C and ADM-A are both just smokin' as of late. Very speculative if it pulls back below $68 the MMR-M and the HL-C a very interesting como se llama. The conversion plus the year of delinquent CUMULATIVE distributions are built into the stock. When it sometimes sells off it is a great chance to get something at a deep discount. HL will of course report monster earnings in 2 weeks and this should drive the shares higher as we are currently seeing with the confirmed but not quite sure discovery that has driven MMR 13% higher in the last two days. PAL another small fry that just got a C$50.4 million infusion on a subsequent share issuance of 16 million new shares. More of an investment as they pivot around the closing price on the deal of $2.87 US $s. The cash will be put into production improvements that should be quickly accretive. HL for instance went deep in the whole for some acquisitions and just paid out $38 million in cash to retire the debt. A 50% move higher in Silver this YTD has left them flush. They have increased their market cap from just under one billion to 1.12 billion in the last 6 weeks.

Oct 22 12:48 AM

[Delojozafado:]

Why mess with Wal-mart? You can just buy Apple a retailer that is unable to meet demand and makes me like the beaten down RFMD. There is also the (HD) HRO if you want a serious dividend. It went ex TODAY! so you can expect a further drop in the next few days in this immediate shadow period. It is near to it's conversion/redemption.

Oct 22 12:55 AM

[Peter Mycro...:]

It amazes me that Lilly fell today with such an amazing earnings release. As for valuation the company is trading at a 2010 price to free cash flow of 7.48 and is paying out a 6% dividend.

I am glad you wrote this article Avi, as I thought I was the only analyst who saw the light of Lilly. It amazes me that Wall Street lets stocks like this become so oversold.

Disclosure; Long LLY

The Fine Print: As Registered Investment Advisors, we see it as our responsibility to advise the following: We do not know your personal financial situation, so the information contained in this communiqué represents the opinions of Mycroft Research, and should not be construed as personalized investment advice.

It should not be assumed that investing in any securities we are investing in will always be profitable. We take our research seriously, we do our best to get it right, and we “eat our own cooking,” but we could be wrong, hence our full disclosure as to whether we own or are buying the investments we write about.

Oct 22 03:48 AM

[prairiedog555:]

After consistently hearing of the excess of US CEO's in pay and perks, I now only own pipeline MLPs and foreign stocks.
I do not trust US companies and that makes me sad.

Oct 22 07:39 AM