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Summary

  • The dividend aristocrats have delivered on dividend growth's greatest gift - market beating total return.
  • The formula for total return might be growing dividends supported by earnings growth and a low payout ratio.
  • The dividend aristocrats are populated with many companies that surprisingly still have low to moderate and very manageable payout ratios.
  • When we add the value filters of Vanguard's dividend growth funds we might be able to find the best of the best among the current 54 dividend aristocrats.

The dividend aristocrats are S&P 500 constituents that have raised their dividend for 25 years and counting. These are the long term best of breed when it comes to dividend payers. To make it here a company generally would have had to have a business or business that have increased revenue and profits to allow for those dividend increases. Certainly there are challenges along the way for many companies, but the trend (to oversimplify) is higher earnings and higher dividends.

Currently there are 54 companies in the Dividend Aristocrat Index.

Here's the list of dividend aristocrats (as of Dec 31, 2013)

Constituent

Symbol

3M Co

(NYSE:MMM)

Abbott Laboratories

(NYSE:ABT)

AbbVie Inc.

(NYSE:ABBV)

AFLAC Inc

(NYSE:AFL)

Air Products & Chemicals Inc

(NYSE:APD)

Archer-Daniels-Midland Co

(NYSE:ADM)

AT&T Inc

(NYSE:T)

Automatic Data Processing

(NASDAQ:ADP)

Bard C.R. Inc

(NYSE:BCR)

Becton Dickinson & Co

(NYSE:BDX)

Bemis Co Inc

(NYSE:BMS)

Brown-Forman Corp B

(NYSE:BF.B)

Cardinal Health Inc

(NYSE:CAH)

Chevron Corp

(NYSE:CVX)

Chubb Corp

(NYSE:CB)

Cincinnati Financial Corp

(NASDAQ:CINF)

Cintas Corp

(NASDAQ:CTAS)

Clorox Co

(NYSE:CLX)

Coca-Cola Co

(NYSE:KO)

Colgate-Palmolive Co

(NYSE:CL)

Consolidated Edison Inc

(NYSE:ED)

Dover Corp

(NYSE:DOV)

Ecolab Inc

(NYSE:ECL)

Emerson Electric Co

(NYSE:EMR)

Exxon Mobil Corp

(NYSE:XOM)

Family Dollar Stores Inc

(NYSE:FDO)

Franklin Resources Inc

(NYSE:BEN)

Genuine Parts Co

(NYSE:GPC)

Grainger W.W. Inc

(NYSE:GWW)

HCP Inc

(NYSE:HCP)

Hormel Foods Corp

(NYSE:HRL)

Illinois Tool Works Inc

(NYSE:ITW)

Johnson & Johnson

(NYSE:JNJ)

Kimberly-Clark

(NYSE:KMB)

Leggett & Platt

(NYSE:LEG)

Lowe's Cos Inc

(NYSE:LOW)

McCormick & Co

(NYSE:MKC)

McDonald's Corp

(NYSE:MCD)

McGraw Hill Financial Inc

(NYSE:MHFI)

Medtronic Inc

(NYSE:MDT)

Nucor Corp

(NYSE:NUE)

Pentair Ltd.

(NYSE:PNR)

PepsiCo Inc

(NYSE:PEP)

PPG Industries Inc

(NYSE:PPG)

Procter & Gamble

(NYSE:PG)

Sherwin-Williams Co

(NYSE:SHW)

Sigma-Aldrich Corp

(NASDAQ:SIAL)

Stanley Black & Decker

(NYSE:SWK)

Sysco Corp

(NYSE:SYY)

T Rowe Price Group Inc

(NASDAQ:TROW)

Target Corp

(NYSE:TGT)

VF Corp

(NYSE:VFC)

Wal-Mart Stores

(NYSE:WMT)

Walgreen Co

(WAG)

As you can see, that's quite an impressive list. And as I stated in this article, you can purchase all of them in ETF form with the ticker aptly named (NYSEARCA:NOBL). Yes, noble they are. Not only that these aristocrats have beat the market over the last 5 years and from the time that they have been tracked. They have captured the greatest gift of dividend growth in the accumulation phase - beating the broader markets such as the S&P 500 or Dow 30.

And according to research the secret to that market outperformance is low payout ratio in tandem with those rising dividends. You can see more on that in this article here, entitled "How To Get The Most Out Of Dividend Growth". Over time, dividend growth companies (if you buy the right ones) have the ability to beat the market by 2%, 3% a year or more (averaged).

From the ETF provider, ProShares' press release:

The S&P 500 Dividend Aristocrats has gained an annualized return of 9.7% since its May 3, 2005 inception, compared to the S&P 500′s 6.7% return.

That's great performance moving through a market correction and into the current bull market phase.

So if the secret to total return success if low payout ratio, it is certainly prudent to look under the hood at the aristocrats and check out that payout ratio. I also looked at the current price to earnings ratios and a short term 3-year snap shot of revenue and earnings. I also wanted to see which aristocrats made it past the value metrics of two recent market beaters, the passive Vanguard Dividend Appreciation ETF (NYSEARCA:VIG) and the actively managed Vanguard Dividend Growth Fund (MUTF:VDIGX). Here's how it looks, separated by inclusion (or not) in those funds. I used dailyfinance.com for earnings, along with yahoo and TD Waterhouse.

Company

Funds

P/E

Yield

Revenue Gro 3-yr

Earnings Gro 3-yr

Dividend Gro 5-yr

Payout Ratio

Both Vanguards

Chubb Corp

V-IGX

9.4

2.3

2.6%

56.6%

6.24%

19.0

Chevron

V-IGX

10.6

3.5

Decline

Decline

9.2%

35.7

Wal-Mart

V-IGX

15.3

2.58

7.8%

10.6%

13.34%

38.59

Target

V-IGX

15.9

2.9

6.6

Decline

21%

43.4

McDonald's

V-IGX

17.6

3.24

4

4.7%

13.3%

55.7

Colgate Palmolive

V-IGX

26.8

2.13

4.1%

Decline

11.56%

56.0

Coca-Cola

V-IGX

20.2

3.2

Flat

Flat

7.89

57.7

Procter&Gamble

V-IGX

21.3

3.05

Decline

9.8%

8%

60.6

Automatic Data & Processing

V-IGX

26.2

2.5

12.8%

7.69%

7.36%

61.0

Cardinal Health

V-IGX

64.5

1.7

Decline

Decline

15.68

108

47.4 avg

VDIGX Only

Johnson & Johnson

IGX

19.3

2.84%

9.6%

38.7%

7.56%

52.7

VIG Only

CR Bard

V

17

.84

5.1%

225%

5.74%

9.53

Franklin Resources

V

14.5

.94

17.8%

22.5%

41%

11.8

Sigma-Aldrich

V

23.4

.97

8%

7.6%

10.8%

20.85

Aflac

V

9.5

2.31

7.9%

61%

18.3%

20.86

Dover Corp

V

14.3

1.88

7.1%

21.7%

9.8%

25.66

Family Dollar Stores

V

15.8

2.06

20%

17.4%

14.1%

25.73

Sherwin-Williams

V

27.9

1.09

16.1%

75%

4.59%

27.0

Ecolab Inc

V

34.4

1.01

194%

65.6%

13.3%

28.51

Cintas Corp

V

22.5

1.3

12%

32.1%

8.26%

28.7

Medtronic

V

16.7

1.9

1.9%

18.9%

8.2%

30.7

Exxon Mobil

V

12.7

2.7

Decline

Decline

9.54%

33.1

WW Grainger

V

21.9

1.51

16.8%

22%

18.7%

31.69

Lowe's

V

23.3

1.47

7.4%

51%

12%

32.5

VF Corp

V

22.3

1.73

20.7%

35.7%

9.15%

33.16

PPG Industries

V

27.3

1.25

1.5%

321%

3.05%

33.31

Abbott Labs

V

23.8

2.3

Neg

Neg

Neg

35.0

Hormel Foods HRL

V

23.6

1.7

10.7%

11.8%

13.9%

35.0

Pentair

V

29.4

1.3

216%

744%

Flat

37.0

Brown-Forman

V

29.3

1.33

13.9%

6%

7.34%

35.78

Archer-Daniels

V

21

2.26

Flat

Decline

7.89

37.29

McGraw Hill

V

27.3

1.51

Decline

63%

16.5%

37.6

Walgreen

V

23.5

1.88

Flat

Decline

23%

40.9

Becton Dickinson

V

24.6

1.89

3.8%

Decline

10.86%

42.48

Illinois Tool Works

V

22.1

2.09

Decline

Decline

6.66%

43.5

McCormick

V

23.3

2.19

11.3%

Flat

9%

47.12

Genuine Parts

V

19.4

2.69

13%

22.7%

7.15%

47.53

3 M Co

V

19.3

2.63

4.2%

12.7%

4.91%

49.3

Bemis

V

18.65

2.8

Decline

15.8

3.47

51.0

PepsiCo

V

18.7

2.8

Flat

7%

6.3%

51.26

T Rowe Price

V

20.6

2.19

2.8%

33.2%

11.77%

58.13

Emerson Electric

V

22.3

2.75

1%

Decline

5.86%

59.0

Air Products and Chemicals

V

25.2

2.6

Flat

Neg

10.2%

60.0

Stanley Black and Decker

V

24.2

2.53

6%

Decline

10.3%

61.1

36.1 avg

Non Vanguard

AT &T T

10.2

5.2

1.6%

521%

2.38

58

Cincinnati Financial

15.39

3.7

19.2%

309%

11.87

53

Clorox

20.49

3.2

6.4%

3.8%

8.32

63

Consolidated Edison

14.7

4.7

Decline

Flat

0.96%

68

HCP Inc.

18.8

5.9

22.4%

10.4%

2.89%

99

Kimberly Clark

20.0

3.0

1.4%

38.7%

7.3%

59

Leggett and Pratt

24.6

3.8

3%

29.5%

3.48%

88

Nucor Corp

33.3

2.9

Decline

Decline

Negative

96

Sysco Corp

21.7

3.2

10.8%

Decline

2.06%

85

AbbVie Ltd

11.2

3.3

74.3 avg

As we can see the Vanguards do pay attention to payout ratio when it comes to picking their aristocrats. And interestingly VIG holds 44 of the 54 aristocrats. It's not surprising that VIG has performed well from inception, though its market beat is modest delivering near 78% from May of 2006 to present compared to SPY's 71.7%.

So how has payout ratio affected the returns of these groupings if we apply the same survivor bias to all? That is, these are the dividend aristocrats that have stayed on the list (obviously) there are many companies that have certainly been dropped from aristocrat status along the way. The next evaluation (below) certainly suffers terribly from survivor bias, and I am admittedly the first to poo-poo on evaluations of this type. Even the stately dividend aristocrat index can be a volatile place with members coming and going with regularity as Eric Parnell recently pointed out in this article here. Also some of the current members would not have been aristocrats 10 or 5 years ago, an investor would have had to grab them when they had dividend histories in the range of 15-24 years. More on that in a future article.

Here's the returns evaluation.

Let's start with the "bottom" and that is the non-Vanguards that have the highest payout ratio average at 74.3%. From January of 2004 to present, the group had a total Return of 157.4% outperforming the SPDR S&P 500 ETF's total return of 104.8%. The total return includes stock price appreciation and dividends.

Here's how the companies that made it into VIG and VDIGX fared. The companies in both of the Vanguard funds total return was 178.8%, outperforming the SPDR S&P 500 ETF's total return of 104.8%.

And then let's have a look at the Vanguards grouped by 12s (the maximum number of companies one can calculate on the total return tool at low-risk-investing.com).

Here's the lowest of the low, with payout ratio of 9.5 to 31.7. The portfolio's total return was 249.8%, outperforming the SPDR S&P 500 ETF's total return of 104.8%.

And here's the next quadrant with payout ratios from 31.7 to 43.5. The portfolio's total return was 258.9%, outperforming the SPDR S&P 500 ETF's total return of 104.8%.

And here's the performance of the final VIG's with payout ratio from 47.1 to 61%. The portfolio's total return was 182.2%, outperforming the SPDR S&P 500 ETF's total return of 104.8%.

Group

Returns

Payout Ratio

Non Vanguards

157.4%

74.3% avg

The Vanguards

178.8%

47.4% avg

VIG Lowest PO

249.0%

9.5-31.7%

VIG Mid PO

258.9%

31.7-43.5%

VIG Highest PO

182.2%

47.1- 61%

What's clear is that, from the groupings, the companies with the low payout ratios have delivered the greatest amount of total return to the aristocrat index, or along the way to becoming an aristocrat. The aristocrats have many of their constituents in that low to modest payout ratio. And with respect to survivor bias, the companies that are holdings in both VIG and VDIGX delivered a total return that is consistent with the 3% average annual outperform of the total aristocrat index.

The non-Vanguards would have underperformed the total Aristocrat holdings or index, that is quite telling. Running the aristocrats through the value filters of VIG and VDIGX appears to hold value for identifying the outperformers and the underperformers.

Could an investor boost or juice the market beating potential of the Dividend Aristocrats by over-weighting to the low payout ratio stocks, or by not including the high payout ratio components? Ha, I'm getting into dangerous territory here as an indexer, I'm starting to think. That said, I am a fan of obvious trends that have a likelihood of repeating. And investors might be wise to apply the metrics that studies show deliver that ability to deliver very attractive (retire-a-few-years-earlier) total returns.

In the end it may be wise to simply buy the ETF NOBL, or if the trading fees are not excessive to purchase each of the index constituents. And as I've stated in previous articles, one may be able to capture the gains of an index by purchasing 15, 20 or 25 companies. If that's your approach, you then may want to pay attention to the payout ratios and then have a look at what the Vanguards have to say.

RISK!

Remember, I am not a stock picker. OK, I hold three individual stocks, only one by design. This evaluation might help you develop a short list for intensive investigation. That said, I would suggest that most investors simply buy the ETF or enough of the aristocrats to replicate the index. And then follow the index, removing a company when the index removes a company.

Most investors on Seeking Alpha do not appear to be able to obtain the returns of this simple index. Those who provide popular public portfolios on Seeking Alpha lag the aristocrats. Why complicate things? Market history says there is the potential to actually beat the market, not by stock picking, but by applying a very simple metric - inclusion on a simple list.

Those who remain stock pickers through and through, I would suggest that you pay attention to a company's value metrics and payout ratio, not necessarily the current yield or the growth of the income in your portfolio - at least for those in the accumulation phase. In the end, it will come down to how much money you have to go shopping for income. Greater total return will equal greater income and an enhanced lifestyle in those retirement years.

Happy investing, and be careful out there.

Disclosure: I am long SPY, DIA, VYM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Dale Roberts is a Streetwise Coach at ING Direct Mutual Funds. The Streetwise Portfolios offer index-based complete portfolios to Canadians. Dale’s commentary does not constitute investment advice. The opinions and information should only be factored into an investor's overall opinion forming process

Source: The Most Important Article I Could Ever Write On Dividend Growth