By Eli Inkrot
With 500 stocks to choose from, picking the top 8 Dividend Stocks might seem like a tall task. In reality the task can be made relatively easy by instituting a variety of important and stringent qualifications. Obviously paying dividends is a requirement, but income investors are looking for much more than that. For example, a long history of paying dividends and a low payout ratio signal that not only will companies pay dividends in the future, but also that they are willing and able to increase the upcoming payouts.
Therefore, only “dividend champions,” stocks which have increased their dividend for at least 25 consecutive years, have been included. Additionally each stock has a payout ratio of 65% or less, signaling sustainability. Finally, current yield is reviewed; however a strong dividend growth rate carries more weight as this is often an overlooked metric for increasing future yield on cost.
Here are the top 8 dividend stocks in the S&P 500:
Abbott Laboratories (ABT) develops and manufactures health care products on a global scale. Having increased their dividend for 39 straight years, ABT has cemented itself in the top 50 for active dividend increase streaks. The current yield of 3.91% is appetizing, but much more so in light of ABT’s near 10% dividend growth rate over each of the last 5 years. The payout ratio tops out at our 65% ceiling, but has proven to be sustainable.
The Clorox Company (CLX) comparatively bottoms out on this list when it comes to longest active streaks of increasing dividends, but the 33 consecutive yearly increases is nothing to turn your nose at. The 3.14% current yield is strong enough and the 13% five year growth rate looks promising. Look for another increased dividend from this consumer product company this July, as the 54% payout ratio upholds the long tradition of strong payouts.
Buying Coca-Cola (KO) could be a knock-out for you just as it was for Warren Buffett and his 200 million shares. This beverage giant has steadily increased dividends for 49 straight years, marking its place at 12th for active increase streaks. Buffett expects the dividend to double in 10 years and with a 5 year growth rate near 10% it could happen even more quickly than that. Regardless, doubling your yield to cost can be an effect way to lock in high returns. The 37% payout ratio is widely sustainable as well. Perhaps a word of caution to those investing today, KO hit its 52-week high Friday and as a result its current yield has stumbled down to 2.83%.
Colgate-Palmolive Co. (CL) comes in with a streak of increasing dividends for 48 straight years, lagging KO by just a year. This consumer products company recently raised its dividend by 9% and is payable to shareholders as of the April 21st Ex-Dividend date. The 2.87% current yield is reasonable given the recent run-up and a 5 year growth rate of 13% looks promising. Additionally, the 54% payout ratio is in line with the company’s goal of increasing shareholder value.
Johnson & Johnson (JNJ), also increasing dividends for 48 straight years, has long been a strong dividend play with an above average current yield. Sporting a 3.65% yield, some question this pharmaceutical giant’s recent problems with recalls and quality control. However JNJ’s financials point to sustainable growth as a 45% payout ratio is coupled with a 13% 10 year growth in dividend payouts. Giving a contrarian view, looks like a value opportunity if you believe in the future prospects of the company.
McDonald’s Corp (MCD) has been serving up smiles to billions for quite some time now and dividend investors have taken notice. Having increased its dividend for 34 straight years, MCD comes in with a current yield of 3.21%. Sure there’s competition from other fast foods forces such as Yum! Brands Inc. (YUM) and Wendy’s/Arby’s Group Inc. (WEN), but MCD’s brand equity still reigns supreme. Emerging market opportunities show the path to growth, but really its MCD’s ability to franchise a majority of their stores that leads to higher margins. The 53% payout ratio suggests sustainability, while the average 26% 10 year growth rate in dividends screams value for investors.
Procter & Gamble (PG) leads this list of these dividend champions having increased their payout for 54 straight years. The 3.13% current yield and 52% payout ratio is in line with expectations. Usually thought of as safe investment play, this consumer product company is making positive waves with its 5 year dividend growth rate nearing 12%. A strong moat and solid 15% target 1 year upside make this most consistent dividend more than attractive.
Just last month income investors might have been unimpressed by Wal-Mart Stores Inc. (WMT) yield of 2.3%, but a March increase led to the current yield of 2.8%. Making consecutive dividend increases for 34 years, look for this superstore to keep ramping up its dividends. It’s hard to say which is more impressive the 34% payout ratio or the near 18%, 10 year dividend growth rate; either way it’s a win for income investors. Just for good measure, factor in that it’s owned by both Warren Buffett and Bill Gates in your calculations.
Can you think of any other to add to the list?
Disclosure: I am long KO.