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The 12 Safest Dividend Aristocrats You Can Buy In June

Jun. 01, 2020 5:54 AM ETAROW, CB, CSL, FELE, GD, GRC, GWW, MDU, MGRC, MO, SEIC, UGI93 Comments

Summary

  • The broader market continues its "hopium" rally, with stocks now pricing in all or nearly all expected earnings growth through 2022.
  • Short-term pullback/correction risk is very high, which is why prudent risk management is more important than ever.
  • The dividend aristocrats have seen a strong rally since March 23rd, but there remain 35 reasonably/attractively priced blue chip quality (or better) aristocrats you can safely buy today.
  • UGI, MGRC, CSL, SEIC, GRC, MO, FELE, GWW, GD, CB, MDU, and AROW represent the 12 safest dividend aristocrats & champions you can buy in June, both from a safe income as well as reasonable to attractive valuation perspective.
  • Within a well-diversified and prudently risk-managed portfolio, these 12 aristocrats offer a good mix of preservation of capital, return of capital, and returns on capital prospects over the next 5+ years.
  • Looking for more stock ideas like this one? Get them exclusively at The Dividend Kings. Get started today »

(Source: imgflip)

Safe and growing dividends are a cornerstone of many successful long-term investment strategies, and not just for retirees.

Dividend growth investing is a proven way of achieving long-term outperformance and also tends to combine other alpha strategies such as quality, lower volatility, and smaller size (relative to S&P 500's $127 billion average market cap).

We suspect many management teams will be reluctant to cut dividends and be willing to use some cash on hand to support dividends.”

So far in 2020, 133 S&P 500 companies have raised their dividends, they add. Some of those increases, however, occurred before the pandemic blew up in the U.S. in mid-March. For example, Kimberly-Clark (ticker: KMB) on Jan. 23 announced it would pay a quarterly dividend of $1.07 a share, up nearly 4% from $1.03.

By the Morgan Stanley analysts’ count, 38 S&P 500 companies had cut or suspended their payouts year to date. Factoring in cuts, suspensions and increases, dividend payouts are down about 2% this year, according to the research note." - Morgan Stanley, May 5th, 2020

The dividend aristocrats are S&P 500 companies that have 25+ year dividend growth streaks, meaning they easily surpass the Ben Graham standard of quality (20+ year streaks without cuts).

And per Morgan Stanley's research, at the start of May large caps in the S&P 500 had cut dividends at approximately 8X smaller rates than the overall universe of dividend stocks (over 250 cuts at the time).

EPS Consensus Estimates Continue To Fall Every Week...Though At Slower Rates

(Source: Brian Gilmartin, IBES/Refinitiv/Reuters/Lipper Financial)

The rate of EPS downward revisions has been 15X the 15-year average this year, as the unprecedented global lockdowns have hammered nearly every industry and sector.

That includes normally recession-resistant ones like medical device makers, due to elective surgeries being canceled

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This article was written by

Dividend Sensei profile picture
110.37K Followers

Dividend Sensei (Adam Galas) is an Army veteran and stock analyst with 20+ years of market experience.

He is a founding author of the investing group The Dividend Kings which focuses on helping investors safeguard and grow their money in all market conditions through the highest-quality dividend investments. Dividend Sensei and the team of analysts (Brad Thomas, Justin Law, Nicholas Ward, Chuck Carnevale, and Sebastian Wolf) help members invest more intelligently in dividend stocks. Features include: 13 model portfolios, buy ideas, company research reports, and a thriving chat community for readers looking to learn how to invest more intelligently in dividend stocks. Learn more.

Analyst’s Disclosure: I am/we are long MO, CB. 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.

Dividend Kings owns UGI, CSL, MO, GD, and CB in our portfolios.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (93)

K
@Dividend Sensei, Thanks for the article and taking the time answer so many of the responses people have that are both positive and negative. I was the one that asked you about FRT in your previous article and I'm happy to see that you added it to your list this time around. My question is about how to invest in a budding ROTH IRA account. After speaking with people i trust in terms of investment, people who work in finance, i was given 3 different strategies for investing in a ROTH: 1) The safest long term strategy will always be vanguard index funds. 2) Doing diligent research on a small number of carefully picked stocks will have the greatest potential (in my case this would be tech stocks since i have been researching them for over 20 years) for exponential growth over the long run. 3) A high yield dividend stock will allow for the most compound interest over the long run and provide reasonable stability as well. Could you share your thoughts on these 3 approaches? i would greatly appreciate it. Also, based on the data you provide it seems that MO is the highest yield dividend with a lot of potential for upside as well. Am i missing something critical by concluding that MO would be the best buy right now based on the data you provide?
Dividend Sensei profile picture
A blue-chip dividend growth ETF like VIG is a "can't' lose" long-term strategy in that they can't all go to zero.

So preservation of capital.

Valuations are stretched though so returns on capital is about average vs S&P 500 (4.5% CAGR probability-weighted expected return over the next 5 years).

VIG has about average return of capital as well, about 13% of your investment recouped through dividends over the next 5 years vs 11% S&P 500.

MO offers the best return of capital, 49% of your investment recouped in dividends over 5 years.

Preservation of capital is 3/5 average, since its BBB rated and 7.5% long-term bankruptcy risk vs S&P zero bankruptcy risk outside of an apocalypse.

A good middle ground is do 50% VIG and 50% individual stocks you believe in.

Just remember the 3 priorites of investing.

3 Priorities of Prudent Long-Term Income Investors

Preservation of Capital: Minimize permanent losses of capital, including from bankrupt companies going to zero

Return of Capital: safe and growing dividends that recoup your investment over time (think Shark Tank/Dragon’s Den royalties)

Return on your Capital: sufficient capital gains & total return potential to achieve your long-term goals on an absolute and risk-adjusted basis

I have a decision matrix I use to make decisions about potential investments.

Amazon is 5/5 on preservation of capital, 1/5 on return of capital (no dividend but liquidity available if you sell) and 5/5 return of capital potential.

So 3.7/5 above-average decision to buy AMZN for a dividend portfolio at this time.

Even though it doesn't pay a dividend.

MO is 3/5 preservation of capital, 5/5 return of capital and 5/5 return on capital, so 4.3/5 very prudent decision from a prudent long-term income investors perspective.
w
Distress in the upstream sector is spreading to the midstream, but not all companies are affected to the same degree

Several years of significant production growth in the Lower 48 saw an accompanying growth of midstream infrastructure, including gathering and processing lines, as well as long-haul pipelines to get the oil to market. For midstream companies that made huge investments based on pre-Covid-19 production forecasts, low utilisation now presents a challenge. Midstream infrastructure projects, many of which were financed with high levels of debt, will struggle to deliver projected returns. And cash flow is falling in tandem with utilisation, limiting the ability of the midstream to increase distribution.

Structural overbuild in Permian basin will hamper midstream recovery

The Permian basin was branded as the growth engine of the US, which drove investments in infrastructure. As a result, long-haul pipelines between the Permian and the US Gulf Coast were overbuilt even before the price downturn. We forecast Permian utilisation will fall further and faster than the Bakken, Wyoming and Colorado to 60% by October this year, and stay at around that level until at least December 2021. By contrast, Colorado and Wyoming midstream infrastructure utilisation rates show a v-shaped recovery, returning to normal levels by early 2021: Bakken stabilises at about 80% utilisation by October 2020.
Dividend Sensei profile picture
I've read about 50 analyst reports and notes at this point.

I keep a close eye on the midstream space for DK and iREIT.

The strongest names are at low risk of a cut, the more speculative names like ET, OKE, and MPLX will come down to what commodity prices do over the next year.

Credit ratings and debt maturities are going to be the biggest issue for the more speculative names.
MO and GD are fine corporations, the rest a bunch of crap companies.
Dividend Sensei profile picture
And that assessment is based on what?
p
the PEG ratio was invented by Jim Slater not Peter Lynch
Dividend Sensei profile picture
Slater invented it and used 0.7 PEG as a guideline while Lynch popularized the concept later using 1.0 PEG rule of thumb.

I personally consider the historical PEG of a company.

Some sectors, like REITs, won't trade at 1.0 or less.

But if a REIT has a historical PEG of 3.0 and trades at 2.0 and its fundamentals are strong, then it may be a very strong buy.
W
I've been wanting to buy GRC, but I am waiting for it to drop a bit. I love the financials of the company, $0 debt. When I start my stock screens, the first 2 inputs are:

1. Debt/equity < .5
2. LT debt/equity <.5

Then I go from there.
Dividend Sensei profile picture
It sounds like a reasonable approach.

It will eliminate a lot of quality names but that's the point of screening.

“The difference between successful people and really successful people is that really successful people say 'no' to almost everything.” -Warren Buffett
a
The “12 Safest Dividend Aristocrats You Can Buy in June” seems a bit sensational for an investing article from the get-go. It is a purely subjective notion, since one cannot be sure these names are, indeed, THE safest dividend stocks, among the aristocrats, that an investor can purchase in June or any other month for that matter. To assume such is nothing more than, dare I say it, speculative. Just sayin’. Nikki
Dividend Sensei profile picture
Not as specualtive as you may think.

As I explain in the article

1. These are blue chip quality aristocrats & champions according to a 11 metric screening process.

2. valuations are reasonable to attractive.

So preservation of capital? Check, strong companies not likely to permanently lose you money.

Return of your capital? Check, safe and growing dividends in all economic/market conditions.

Return on capital? Check, reasonable to attractive margins of safety means greater likelihood of earnings good capital gains.

There are just over 100 aristocrats/champions in existence.

I have all of them on the Master List.

I have screened them all for safety/quality and update them all at least twice a year, most every few weeks.

So in terms of being "the best" it's not as speculative as it sounds.
Gerard Kaman profile picture
All stocks mentioned in article have ST topped out according to RSI and are sell not buy positions at this time. Including MO one of my largest holdings.
Dividend Sensei profile picture
I'm not a market timer. Just a long-term fundamentals/valuation/risk management-focused income investor.
M
Hi DS...you have CB on the list...what do you think of AFLAC (AFL) ?
Dividend Sensei profile picture
AFL is a fine aristocrat and a reasonable buy.

However, growth prospects are very weak.

Here is the note I just did for a DK member who requested an analysis through our company analysis request tool.

"Aflac (AFL) safety check on this dividend aristocrat insurance company.

2020 EPS payout ratio 26% vs 26% vs 29% stress test last time vs 50% safe for insurers

Debt/Capital: 20% vs 18% last update vs 20% safe

S&P Credit rating: A- positive outlook (2.5% 30-year bankruptcy risk)

Fitch Credit rating: A+ stable outlook (0.6% 30-year bankruptcy risk)

Moody’s Credit rating: A3 (A- equivalent) stable outlook (2.5% 30-year bankruptcy risk)

Dividend growth streak: 37 years vs 20+ Graham standard of excellence, dividend king

A very strong balance sheet as Moody’s reaffirmed on March 31st. Even under a 10% EPS stress test payout ratio won’t come close to threatening the dividend.

“According to Moody's, Aflac's A3 senior debt rating reflects the company's excellent franchise and strong market position in supplemental health in both the US and Japan. Aflac's excellent financial profile, supported by strong profitability, liquidity and coverage of interest expense, is partially offset by the company's limited product diversification and somewhat concentrated investment portfolio.

We believe the ultra-low interest rates, bear market, and coronavirus-driven restrictions on movement of the population will stress most aspects of life insurers' financials, including those of Aflac. This includes sales, capital adequacy, and the investment portfolio which could weaken if the recent market conditions persist.

Moody's noted that the debt issuance will have modest impact on Aflac's strong financial flexibility as pro forma adjusted financial leverage is expected to remain in the low 20% range. Aflac's earnings coverage continues to remain very strong at over 12 times.” - Moody’s

Here’s what management said in the conference call.

“Our overall approach to stress testing seeks to inform our decision making along with ensuring we defend the following during periods of high volatility; keeping our promise to policyholders in a time of need; protecting our strong insurance ratings and access to capital; maintaining our strong regulatory standing and communication; ensuring no disruption to our core franchise and planned investments; and finally, defending our 37-year track record of increasing the common stock dividend.” - COO

5/5 safety confirmed.

Profitability wise top 65% of insurers, so ⅔ business model.

Management quality also ⅔ so still a 9/11 blue chip. We’re looking for a 15% discount for a potentially good buy.

Fair value still $45 (Morningstar estimate $46), and so 28% discount makes it a potentially strong buy.

I say potentially because AFL’s issue has always been growth. 2.5% CAGR was the last long-term growth consensus from FactSet but that’s down to 0.7% CAGR but from 1 analyst.

So opinion, not consensus. 1.9% CAGR analyst consensus (from 14 analysts) through 2022, better but still pretty weak.

0.1% CAGR from Ycharts, and Reuters’ 2.2% CAGR from 14 analysts.

They meet or beat 91% of the time over 20 years, so 0% to 3% growth consensus range down from 1% to 3% last update.

AFL historically trades at 10 to 11 times earnings. They’ve never grown this slowly though, so we need to use the Graham/Dodd fair value formula for appropriate PEs.

0% growth = 8.5 fair value PE and 3% is 14.5 but we cap it at the 11 that the market has actually paid.

5% to 14% CAGR total return potential over the next five years if it grows at 0% to 3% and returns to 8.5 to 11 PE.

On the other hand, the consensus total return potential, based on the 1.9% CAGR growth consensus through 2022 and a return to 11 PE (12.3 is fair value multiple for such a slow-growing company per Graham/Dodd fair value formula) is 22% CAGR.

So overall a solid 3.5% yielding undervalued company that could deliver good returns.

I personally wouldn’t own it due to the slow growth outlook but a reasonable and prudent choice if you’re looking for above-average yield and very safe dividends."

All such notes go into our company update database, searchable by ticker.
d
Interesting. Your chart of cuts since 2007 includes MO (Altria) as having a cut in 1/31/2007, but your recommended list also includes MO claiming a 50 yr streak (at least in the PEG discussion area.) Which is it??
Mason A profile picture
If you read the note directly under the picture that you're referencing it will clear that up for you.
Dividend Sensei profile picture
MO didn't cut when adjusted for spin-offs in Kraft, and Philip Morris International.
Illuminati Investments profile picture
Not sure about CVX and XOM being amongst the "safest", but the others look solid. Unfortunately, 4-5% yield is about the highest you'll get in this market.
Dividend Sensei profile picture
They didn't make the list, for the reasons explained in the article. XOM made the screen, and was rejected due to the speculative nature of oil prices right now.

CVS is better-positioned thanks to lower capex but also speculative and so was excluded from the 12 company list.
Illuminati Investments profile picture
Ah, thanks. Sorry, was just looking at the Screener.
Dividend Ambassador profile picture
Of the list, I’d go w GD.
s
Long-term investments.
j
12?
UGI, MGRC, CSL, SEIC, GRC, MO, FELE, GWW, GD, CB, and AROW represent the 12
j
You missed MDU...
t
I'm not sure why this post is so long....perhaps someone threw a pot of spaghetti at the wall to see what would stick? I notice the AAA Credit chart is sourced from the "University of St Petersberg (sic)." The only university I can find by that name is in Russia. Strange stuff.
l
twm
I agree. His articles are always too long. Takes all day to read, and there is too much info. He must be paid by the word.
Mason A profile picture
lol, Seeking Alpha authors are paid by view count.
Dividend Sensei profile picture
Yes, that's the University that did the study.

However, long-term default rates track closely with their findings, according to S&P.

And since defaulting on bonds tends to lead to bankruptcy then I consider the data accurate.
l
Is this recommended to IRA long term accounts?
Dividend Sensei profile picture
The approach outlined in the article is appropriate for all kinds of accounts.

IRAs are tax-deferred, Roths are permanently deferred, and you only have to scale your position sizing and tweak your asset allocations depending on which kind of account you use.

IRAs, 401Ks, and Roths are not meant to be tapped in emergencies but you can do so as long as you avoid taking out the profits (just principle) to avoid the early withdrawal fees.
Vladimir Lavrentiev profile picture
D.S., is it good to buy REIT like SPG on 2020-Q2 earning drop? It has good recovered after 2008-2009.
Dividend Sensei profile picture
SPG is currently a fallen angel due to the dividend cut management telegraphed during the conference call.

Likely to be less than 50% but unlikely they avoid a cut entirely.

A 1% or smaller speculative position in a well-diversified portfolio is fine at these best in 12-year valuations.

SPG is likely to be one of 2 mall REITs that survives this actual retail apocalypse.

Brookfield will be the other.

But their long-term growth prospects are far cloudier now than before the pandemic.

UBS estimate 150K stores will close through 2025.

That's going to create a mighty headwind for mall REITs, and kill off all but the strongest.

I own SPG myself, no plans to sell it, but not buying more either.

My position size is about 1% so at the recommended max risk limit.
SleepyInSeattle profile picture
I am not convinced and I am disappointed that some of the stocks you mention are not at all Aristocrats. Some are not even safe, e.g. UGI (GAS), AROW (SMALL CAP BANK).
wolfemp profile picture
AROW is fundamentally very strong, one of the best managed small regional banks in the country and has been an exceptional strong , steady investment for some time now. Also, often overlooked in these articles, they have paid an annual 3% special dividend in stock for more than 10 years now.
mwh27 profile picture
Anybody look at TFSL? Well worth a look in my view! Over 7% dividend and partway through a "conversion."

finance.yahoo.com/...
SleepyInSeattle profile picture
@wolfemp - I have been burned by small caps banks in the past, even by those who seemed strong. There are safer investments out there, especially in these very uncertain times.
matratra profile picture
I would not touch either one of them.
Larry Hall profile picture
Nice piece and recommendations. Have looked at Grainger a few times and will look at some of the others. Own ROST and, oh well about that dividend for now.
Dividend Sensei profile picture
ROST is the first failed aristocrat of the recession.

SYY, AMCR, and FUL are the 3 highest risk ones to join it.

SYY due to business model disruption and the others due to high debt going into the recession.
Larry Hall profile picture
Still like ROST, its returns over time are great, and I hope the divvy will be restored. If not, I will take my divs/distributions from ET, MAIN, TSLX, NEWT, ABBV and XOM and just watch ROST's price rise over the next few years - many obstacles and all..
Dividend Sensei profile picture
They plan to bring it back when they can.
Kyle Fishman profile picture
12? looks like eleven to me:
"UGI, MGRC, CSL, SEIC, GRC, MO, FELE, GWW, GD, CB, and AROW represent the 12 safest dividend aristocrats & champions"

UGI - natural gas company? you call that safe? that whole sector's been risky.

I'm taking a look at all of the dividend aristocrats and I can think of quite a few that are safer than these. the health care ones for sure -- Medtronic, Johnson & Johnson....
the consumer staples; Proctor & Gamble, Kimbely Clark, Colgate, Hormel Foods
the low-cost powerhouse leaders: Walmart, Target
those are household names! the ones you mentioned I haven't even heard of before!

in fact --- most of the ones you mentioned are not even in the S & P 500. geez.
(so technically by definition, they're dividend champions, not aristocrats --- kind of a misleading article title.)
j
Kyle, Target? watched any news lately?
M
Perfect time to buy if it drops at all.
j
@Kyle Fishman, You missed MDU...
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