- 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 8.1% and 11.2%, 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 have highlighted each of these stocks over the course of a 5-part series. Below is a schedule of the entire series (with links to previous articles). 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: First Team
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 First Team (stocks #1-5). The tables below summarize some of the key data points that we analyze when ranking our dividend stocks.
#5 Johnson & Johnson (NYSE:JNJ)
Johnson & Johnson has a decent dividend yield of 2.7% and it has grown its dividend for 50 consecutive years, including a compound annual growth rate of 10.6% over the past 10 years. In addition, the company has a strong balance sheet with very little debt as illustrated by its high Financial Stability rating (91).
#4 McDonald's Corp. (NYSE:MCD)
McDonald's carries a very high rating for Dividend Track Record (96) 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 100%, 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 23% over the past 10 years! MCD is probably one of the best dividend growth stocks of all time.
#3 3M Company (NYSE:MMM)
3M has paid dividends to its shareholders without interruption for more than 97 years. MMM has delivered shareholders a 169% total return over the past five years, and it has increased its dividend at a compound annual rate of 6.5% over that period (including a whopping 35% hike in 2014!). In addition, the company has above average ratings for Financial Stability (88) and Dividend Sustainability (68), so the stable dividend trend should continue for the foreseeable future.
#2 Kimberly-Clark Corp. (NYSE:KMB)
Kimberly-Clark has a decent current dividend yield (3.0%) and a very respectable 5- and 10-year dividend growth rate of 6.9% and 8.7%, respectively. The stock has also performed well over the past 5 years, with a total return around 157%. All that with an ultra low beta of 0.25!
#1 Genuine Parts Company (NYSE:GPC)
Genuine Parts has paid a dividend every year since going public in 1948. Over the past 5 years the company has delivered shareholders a total return of 199% and it has grown its dividend at a compound annual rate of 6.9%. In addition, GPC has a high Financial Stability (89) and Dividend Sustainability (67) ratings. The company has over $100 million of cash on its books and a very low debt-to-EBITDA ratio (0.75x).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).