- 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, the five Aristocrats highlighted below have 5-year and 10-year dividend CAGRs of 10.6% and 16.0%, 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:
All Dividend Aristocrats Are Not Created Equal
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.
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 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 5 stocks that made the Third Team (stocks #11-15). The tables below summarize some of the key data points that we analyze when ranking our dividend stocks.
#15 Clorox Company (NYSE:CLX)
CLX has delivered shareholders a total return of 98% over the past 5 years driven by a compound annual dividend growth rate of 9.1%. CLX has increased its dividend to shareholders every year since 1977. In addition, the stock has had a very modest maximum drawdown during the past recession of 28.4%, which has allowed CLX investors to sleep very well at night.
#14 Lowe's Companies Inc. (NYSE:LOW)
Lowe's carries one of our highest ratings for Dividend Track Record (98) and Dividend Sustainability (98). The company has paid a cash dividend each quarter since becoming a public company in 1961 and it has increased its dividend at a compound annual rate of 28.7% over the past 10 years. Needless to say, despite a current dividend yield of 2.0%, we think that Lowe's is a great long-term dividend stock to consider for your portfolio.
#13 Colgate-Palmolive (NYSE:CL)
To say that Colgate-Palmolive is a stable long-term dividend payer is an understatement. According to the company's website, CL has "paid uninterrupted dividends on its common stock since 1895". Needless to say, the company is also a member of the of the S&P 500 Dividend Aristocrats club. Over the past 5 years, the company has delivered shareholders a 116% total return, and it has increased its dividend at a compound annual rate of 11.8% over that period.
#12 PepsiCo, Inc. (NYSE:PEP)
PepsiCo has great ratings for Financial Stability (81) and Dividend Track Record (91) and it has increased its dividend at a compound annual rate of 13.5% over the past 10 years. In fact, the company has paid consecutive quarterly cash dividends since 1965, and 2014 marked the company's 42nd consecutive annual dividend increase. This is another decent core stock for a retirement portfolio, in our opinion.
#11 T. Rowe Price Group (NASDAQ:TROW)
T. Rowe Price has delivered shareholders a 121% total return over the past five years, and it has increased its dividend at a compound annual rate of 10.2% over that period (including 14.3% and 12.5% hikes in 2013 and 2014, respectively). We believe that TROW is one of a few solid non-REIT Financial stocks that warrant consideration in a long-term dividend portfolio.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).