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:
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.
All Dividend Aristocrats Are Not Created Equal
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 All Aristocrat Team: Second 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 Second Team (stocks #6-10). The tables below summarize some of the key data points that we analyze when ranking our dividend stocks.
#10 Wal-Mart Stores (NYSE:WMT)
Wal-Mart is one of the best dividend growth stocks of all time (in our opinion). The company has increased its dividend at a compound annual rate of 14.6% and 18.0% over the last 5 and 10 years, respectively. Also, the company still has a very modest payout ratio of 38%, so it has plenty of room to continue to increase its dividend in the future.
#9 Chubb Corporation (NYSE:CB)
In 2013, Chubb returned nearly $1.8 billion to its shareholders through a combination of share repurchases and dividends. In addition, Chubb recently announced another 14% hike in its dividend for 2014, representing its 32nd consecutive annual increase. CB is also one of only a handful of stocks that has a sub-rating over 75 for Dividend Track Record (90), Financial Stability (77) and Dividend Sustainability (79).
#8 Family Dollar Stores (NYSE:FDO)
Family Dollar carries one of the highest rankings of any stock in our universe for Dividend Track Record (99). FDO has delivered shareholders a 112% total return over the past five years, and it has increased its dividend at a compound annual rate of 16.4% over that period (including 24% and 19% hikes in 2013 and 2014, respectively). We believe that FDO warrants consideration in a long-term dividend portfolio despite its low relative yield of 2.0%.
#7 Automatic Data Processing (NASDAQ:ADP)
In November, Automatic Data Processing increased its annual dividend rate by 10%. This increase marks the 39th consecutive year in which the company has raised its dividend. Over the past 10 years, ADP has grown its dividend at a compound annual rate of 13.4%. In addition, the company has a very high Financial Stability rating (91) and a strong balance sheet (with very little debt on its books).
#6 McCormick & Company (NYSE:MKC)
Despite a current dividend yield of only 2.0%, McCormick & Company is definitely a stock to consider for your DIY Dividend Portfolio. The company recently increased its dividend 9% for 2014, which was the 28th consecutive year that the company has increased its quarterly dividend. Over the past 5 years, MKC shareholders have enjoyed a 166% total return, including a 9.1% compound annual dividend growth rate over that same period.
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).
Disclosure: I am long WMT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.