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Summary

  • Fears of a major correction are rising as stocks continue to hover around all-time highs.
  • One of the best ways to generate stable income in any market environment is through dividend growth investing.
  • Ideally, you want to build a portfolio of dividend paying stocks that have a track record of increasing their dividends every year.
  • On average, our All-Aristocrat Team has 5-year and 10-year dividend CAGRs of 9.0% and 11.8%, respectively.

In the current market environment, it is important for income investors to choose their dividend stocks wisely as they are putting new money to work. The markets will certainly continue to ebb and flow, but there certainly seems to be more downside risk than upside potential for the market over the next 3-6 months.

One of the best ways to generate stable income in any market environment 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 26 Dividend Aristocrats with the highest Parsimony Ratings that also meet this additional criteria below.

  • Parsimony Rating > 50
  • Dividend Yield > 2.0%
  • 5 and 10-year Dividend CAGR: > 2.0%
  • 5 and 10-year EPS CAGR: > 0.0% (i.e., positive growth)

We will highlight each of these stocks over the course of a 5-part series. Below is a schedule of the entire series. Please make sure to "follow" us so that you will be notified when we publish future articles.

  • Part 1: Honorable Mention (stocks #21-26)
  • Part 2: Fourth Team (stocks #16-20)
  • Part 3: Third Team (stocks #11-15)
  • Part 4: Second Team (stocks #6-10)
  • Part 5: First Team (stocks #1-5)

The All Aristocrat Team: Honorable Mention

The vast majority of the 2014 S&P Dividend Aristocrats (there are 53 total) rank very highly in our system, but we only picked the best of the best for our All-Aristocrat Team. This article highlights the 6 stocks that made Honorable Mention (stocks #21-26). The tables below summarize some of the key data points that we analyze when ranking our dividend stocks.

#26 Chevron Corporation (NYSE:CVX)

Chevron has delivered shareholders a 118% total return over the past five years, and it has increased its dividend at a compound annual rate of 9.0% over that period (including 11.1% and 7.0% hikes in 2013 and 2014, respectively). We believe that CVX is one of a few top notch non-MLP Energy stocks that warrant consideration in a long-term dividend portfolio.

#25 AT&T Inc. (NYSE:T)

AT&T seems to go in and out of favor with dividend investors, mainly because of the company's choppy revenue and earnings growth and its borderline dividend growth (only 2.4% on average over the past 5 years). That said, many investors succumb to the high dividend yield (5.2%). We view AT&T as "utility-like" and think it certainly warrants consideration in a long-term dividend portfolio.

#24 HCP Inc. (NYSE:HCP)

Despite HCP's relatively low historical dividend growth rate, the company has a very nice dividend yield (5.2%). HCP is a Real Estate Investment Trust, which is why its historical payout ratios are so high (due to a REITs requirement to distribute the majority of its earnings to shareholders). HCP was the first healthcare REIT selected to the S&P 500 index, it has increased its dividend per share for 28 consecutive years, and it is the only REIT included in the S&P 500 Dividend Aristocrats index.

#23 Bemis Company (NYSE:BMS)

Bemis has been on the S&P Dividend Aristocrat list since 2008 (and its one of only a few Materials sector stocks in the index). Bemis recently announced a 4% increase to its quarterly cash dividend, marking the 31st consecutive year that the company has increased its dividend payment. The company has been paying an annual dividend on its stock since 1922.

#22 Air Products & Chemicals (NYSE:APD)

Air Products & Chemicals has delivered shareholders a 112% total return over the past five years, and it has increased its dividend at a compound annual rate of 10.4%% over that period (including 11.0% and 8.5% hikes in 2013 and 2014 respectively). The company is diversified globally and it should continue to generate consistent cash flow in the years to come.

#21 Target Corp. (NYSE: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 21.6% over the past 5 years. This steady dividend growth rate has led to a total return of 61% for shareholders over that same period (even despite the recent hiccup in shares over the past year). This is a stock that we think investors should "target" right now (due to the pullback) because all signs continue to point to stable dividend growth.

Summary

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 would make a nice addition to your portfolio. Note that identifying good stocks is only the starting point of building a dividend portfolio and investors should pay close attention to valuation as well when deciding whether or not to buy a stock as many stocks right now are overvalued (i.e., good stocks can often trade at bad prices).

Disclosure: I am long CVX, T, TGT. 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.

Source: The All-Aristocrat Team: Dividend Stocks You Can Trust In An Uncertain Market (Part 1)