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Summary

  • List of the Top 7 Fastest growing Dividend Aristocrats (there are some surprises).
  • In depth look at the difference between quality, value, yield, and growth.
  • List of the Top 7 Highest Yielding Dividend Aristocrats.
  • Wal-Mart, Coca-Cola, PepsiCo, and McDonald's all have total returns over 10% coupled with strong competitive advantages.
  • List of the Top 7 Highest Total Return (growth + yield) Dividend Aristocrats.

Dividend investors often focus on dividend yield instead of growth. Growth is equally important to yield for long term investing success. Returns from your stocks can only come from two places: dividends and capital appreciation. Think of growth as the capital appreciation side of the return formula.

For example, say you have invested in 3 stocks. Stock one has a dividend yield of 6% and 0% growth. Stock 2 has a 3% yield and 3% growth. Stock 3 has a 0% yield and 6% growth. All 3 of these stocks will give you the same compound annual growth rate, assuming you reinvest dividends and valuation multiples remain unchanged.

Highest Growth Dividend Aristocrats

I calculate growth rate as the lower of the 10 year revenue per share or dividend per share growth rate. Dividend per share growth can be inflated by increasing the payout ratio. In the long run, this is unsustainable. Using the lower of dividend or revenue growth eliminates bias from increasing payout ratios. Further, if a company grows revenues much faster than dividends , it is likely investing in low margin business. Using the lower of dividend growth and revenue growth is a better measure of true underlying business growth than either metric in isolation. The top 7 fastest growing Dividend Aristocrats are shown below, along with their respective compound annual growth rate:

  1. Family Dollar Stores (NYSE:FDO) - 11.61% per year
  2. T Rowe Price Group (NASDAQ:TROW) - 10.43% per year
  3. Ecolab (NYSE:ECL) - 10.43% per year
  4. W.W. Grainger (NYSE:GWW) - 10.19% per year
  5. Archer-Daniels-Midland (NYSE:ADM) - 9.83% per year
  6. PepsiCo (NYSE:PEP) - 9.25% per year
  7. Coca-Cola (NYSE:KO) - 9.04% per year

Highest Yield Dividend Aristocrats

To be included in the Dividend Aristocrats Index, a business must have 25+ years of consecutive dividend increases. The Dividend Aristocrats are known for their dividend payments. The 7 Dividend Aristocrats with the highest yields are listed below:

  1. HCP Inc. (NYSE:HCP) - 5.16% yield
  2. AT&T (NYSE:T) - 5.13% yield
  3. Consolidated Edison (NYSE:ED) - 4.40% yield
  4. Cincinnati Financial (NASDAQ:CINF) -3.66% yield
  5. Leggett & Platt (NYSE:LEG) - 3.64% yield
  6. Target (NYSE:TGT) - 3.42% yield
  7. McDonald's (NYSE:MCD) - 3.40% yield

Highest Total Return (Growth + Yield) Dividend Aristocrats

Adding current dividend yield to historical growth gives us total return. The total return number is the expected return of a stock including dividends, share repurchases, and organic growth. Total return does not include gains that may be realized from changes in valuation multiples such as the P/E ratio. The 7 Dividend Aristocrats with the highest total return are listed below:

  1. Family Dollar - 13.66%
  2. T Rowe Price Group - 12.57%
  3. PepsiCo - 12.13%
  4. Coca-Cola - 12.03%
  5. W.W. Grainger - 11.98%
  6. Archer-Daniels-Midland (ADM) - 11.82%
  7. Ecolab (ECL) - 11.43%

Coca-Cola and Pepsi are often compared to one another. It is very unusual to see them right next to each other in both the growth and total return categories. Family Dollar has the highest overall total return numbers, followed by T Rowe Price Group, PepsiCo, and Coca-Cola. You can download the Excel Spreadsheet of all 54 Dividend Aristocrats and can sort by yield, growth, total return, or P/E ratio right here.

Dividend yield is more secure than growth. A Dividend Aristocrat that pays shareholders a dividend is likely to pay the same (or higher) dividend payment to shareholders in the future. Growth is much less stable. Companies like PepsiCo and Coca-Cola have stronger brands and proven techniques to grow revenue year after year (share repurchases, emerging market growth).

Compare Family Dollar to Coca-Cola and PepsiCo; it has grown faster, but it operates in the extremely competitive discount retailer industry. PepsiCo and Coca-Cola have the advantage of strong brands and large market shares while Family Dollar does not. Family Dollar must compete with significantly larger players such as Wal-Mart, Amazon (indirectly), Costco, and Target. PepsiCo and Coca-Cola can increase prices while Family Dollar cannot significantly raise margins without losing market share.

Quality

When you consider the differences between dominant companies like Coca-Cola and less dominant companies like Family Dollar, it comes down to quality. A high quality business has a greater likelihood of growing profitably in the future than a lower quality business. I think of quality as the probability that the business will continue to thrive. Family Dollar (in my analysis) is of lower quality than Coca-Cola because its future is somewhat less secure.

With that being said, all Dividend Aristocrats are of higher quality than the average stock because they have increased dividends for 25+ consecutive years. The long history of Dividend Aristocrat stocks shows that the companies included can grow profitably over long periods of time; being a Dividend Aristocrat is strong evidence of a durable competitive advantage.

Value

The final consideration when purchasing a stock is the value you receive in relation to what you pay. Value is commonly expressed using a variety of multiples, such as P/E, P/B, P/S, EV/EBITDA, P/FCF, etc. Valuation clearly matters in investing. Purchasing a stock that isn't growing at 100x its earnings is a sure way to destroy value. On the other hand, a high quality business that is growing faster should command a higher valuation multiple than a slow growing low quality business.

Of the Dividend Aristocrats with a total return score over 10%, only 3 stocks have a P/E ratio under 18:

  1. Wal-Mart - 10.72% total return, 15.84 P/E ratio
  2. McDonald's - 10.49% total return, 17.32 P/E ratio
  3. AFLAC (NYSE:AFL) - 10.86% total return, 9.89 P/E ratio

All 3 of these businesses are market leaders. Wal-Mart has the largest market cap of any discount retailer, nearly 5x the size of its largest direct competitor Costco. McDonald's is by far the largest restaurant chain in the world by market cap, nearly 3x as large as its nearest competitor Yum! Brands. Finally, AFLAC is the leader in supplemental cancer insurance, and the market leader of health insurance in Japan. AFLAC is significantly riskier than Wal-Mart and McDonald's, however, due to its exposure to Japanese treasuries and Yen.

Putting it All Together

The 8 Rules of Dividend Investing combine total return, quality, and value to rank businesses with 25+ years of dividend payments without a reduction. Ranking stocks based on quantitative metrics provides an unbiased approach to investing as underlying emotions about the business don't interfere with the actual investing process.

Of the businesses listed in this article, 4 are in the Top 10 stocks to own based on the 8 Rules of Dividend Investing. The 4 are: Wal-Mart, McDonald's, Coca-Cola, and PepsiCo. These businesses all have strong total return numbers and are of high quality without being especially expensive. The rankings of businesses change over time as valuation multiples change and businesses release their quarterly and annual results.

Disclosure: The author is long WMT, MCD, PEP. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.

Source: 7 Highest Yielding, 7 Fastest Growing And 7 Highest Total Return Dividend Aristocrats