The Dividend Aristocrats are a great starting point for building a robust portfolio of dividend-paying stocks. After the recent market sell-off, a lot of the yields on these stocks have reaching compelling levels. The top 5 highest-yielding Dividend Aristocrats are shown below. We take a look at which ones to buy and which to avoid:
CenturyLink (CTL) has been generating a lot of interest lately as the highest-yielding Dividend Aristocrat. The key question then, for true dividend investors, is whether or not its 8% yield is sustainable. While I’m a firm believer that dividend growth investing always works over time, simply chasing the highest-yielding stock out there (even if it’s a Dividend Aristocrat) will, at some point, blow up in your face.
With regard to CTL, there has been some concern cited over the fact that its dividend payout ratio is over 100% of earnings. While, at face value, that looks like a bad thing, it’s important to remember that “Earnings” is different from “Free Cash Flow” and includes non-cash expenses like amortization and depreciation, which dramatically increased this quarter. The company’s FCF, however, is robust and increasing. Dividends paid out only represent about 58% of FCF. Furthermore, management is dedicated to making acquisitions that are accretive (there are numerous SA articles detailing this).
The bottom line is, CTL’s dividend is safe, and should actually grow over the coming years. Furthermore, CTL has sold off rather significantly with the broad market and now represents some very compelling near-term upside.
The number two high-yielding Dividend Aristocrat is Pitney Bowes (PBI), which is in the business of providing equipment, software, and facilities services for mail processing equipment to companies for mail distribution. This is a company with fortunes very much tied to an economic recovery. If this current slow growth environment becomes the “new normal,” then future dividends, while probably not in jeopardy, will likely continue to grow at an increasingly slow rate (currently about 1.4% annually vs 3.6% in ’06).
PBI is a powerhouse of a company, to be sure, but revenues and margins have declined since ’07, and its been paying out an increasingly large portion of its earnings (and FCF) to service a dividend payment that's growing slower and slower. The stock is compelling on a valuation basis, but without any clear catalyst to unlock that value, investors could be left holding on for awhile waiting for Mr. Market to reward them. An 8% yield isn’t anything to scoff at, but there are better 8% yielders available with better growth prospects. This is a Dividend Aristocrat we’d avoid for now.
Cincinnati Financial (CINF) is a property and casualty insurer based in Ohio. Insurance is one of my favorite industries to hunt for dividend payers. CINF has very conservative underwriting, is currently trading at less than book value and has a solid history of increasing dividends (average annual growth of 7% for the past five years). The stock is down about 13% YTD, and the CFO just purchased 16,500 shares. This is a Dividend Aristocrat worth buying at these levels, and locking in a great yield with a lot of upside growth.
Leggett & Platt (LEG) is worth a serious look for all dividend investors and has long been one of my favorite Dividend Aristocrats. The 128-year-old company, which makes everything from bed sheets to seatbelts to office furniture, has increased its dividend every year for the last 40 years (second only to Johnson & Johnson (JNJ) and Lowe's (LOW)). Dividends have doubled almost every five years and risen at an average annual compound rate of 14%. The company is buying back almost 10M shares this year, is well-poised for any recovery in consumer demand and is yielding almost 6% after this week’s market sell-off.
Consolidated Edison (ED) is the fifth-highest-yielding Dividend Aristocrat and another one that’s gotten a lot of attention for its relatively fat dividend yield. ConEd isn’t the largest utility out there, but it gets a lot of attention because it services the New York City area. For that reason, NYC is a main determinant for growth for this stock. As with pretty much all utilities, ConEd can be counted on to continue to crank out a pretty reliable earnings stream (and thus dividend payments), but for the last several years the actual dividend increases have been very weak (half a penny each quarter). Like PBI, this stock will continue to pay a decent dividend, but I wouldn’t count on it to grow any time soon. Investors can find much better values, with equal or better yields, elsewhere.