This article updates one I wrote in October 2020:
Since the October article, the S&P Dow Jones Indices announced the annual rebalancing of the S&P 500 Dividend Aristocrats index. Three stocks were added to the index, while three spin-offs were removed because their combined dividends as three separate entities decreased. So there are still 65 Dividend Aristocrats, but their sector distribution changed.
This article again ranks the Dividend Aristocrats using DVK Quality Snapshots, providing updated key metrics, quality indicators, and fair value estimates. Additionally, I provide a downloadable spreadsheet with fundamental and added value data for all Dividend Aristocrats.
The S&P 500 Dividend Aristocrats Index is a list of companies in the S&P 500 that have paid higher dividends every year for at least 25 consecutive years. The list is maintained by S&P Dow Jones Indices and updated annually in January.
To be included in the list, stocks must meet several criteria:
If a company suspends or cuts its dividend or if it is removed from the S&P 500 index, the company is removed from the list of Dividend Aristocrats as well.
There are additional diversification criteria, both stock-specific and sector-specific. There must be 40 members on the list, and no sector can have more than 30% membership. To learn more, visit this page, scroll down, and click on "Methodology" under "Documents".
On 22 January 2021, the S&P Dow Jones Indices announced the annual rebalancing results for the S&P 500 Dividend Aristocrats. These changes took effect prior to the market opening on 1 February 2021.
Here are the newcomers and the sectors they belong to:
|International Business Machines Corporation||IBM||Information Technology|
|NextEra Energy, Inc||NEE||Utilities|
|West Pharmaceutical Services, Inc||WST||Health Care|
And here are the stocks that were removed:
|Carrier Global Corporation||CARR||Industrials|
|Otis Worldwide Corporation||OTIS||Industrials|
|Raytheon Technologies Corporation||RTX||Industrials|
CARR, OTIS, and RTX were spin-offs when United Technologies Corporation (UTX) merged with Raytheon Company (RTN). In January, these companies were removed from the index because their dividends as three separate entities were lower than the dividend paid under the UTX umbrella.
The annual rebalancing of the S&P 500 Dividend Aristocrats index removed three stocks from the Industrials sector and replaced them with one stock each from the Information Technology, Utilities, and Health Care sectors.
Below is a chart showing the new sector distribution of the Dividend Aristocrats:
In earlier articles, I presented the Dividend Aristocrats by supersector:
| Defensive Sectors are not closely tied to the economy because companies in these sectors provide goods and services that are always in demand.|
| Cyclical Sectors are closely tied to the ups and downs of the economy. When the economy is thriving, companies in cyclical sectors do well because unemployment is low and wages increase. In downturns, though, companies in cyclical sectors tend to struggle as consumers are less confident about the future.|
| Sensitive Sectors are sectors that ebb and flow with the overall economy but to a limited degree. Companies in these sectors are not immune to a poor economy, but they also may not be as severely impacted by economic downturns.|
Below is a chart showing the new supersector distribution of the Dividend Aristocrats:
Source: Created by the author
I'm looking to increase my exposure to defensive stocks and generally diversify my portfolio more evenly among the supersectors. Longer-term, I need to slowly transition to a much more defensive distribution, especially as I approach retirement.
I use DVK Quality Snapshots to assess the quality of stocks. The system employs five quality indicators and assigns 0-5 points to each quality indicator, for a maximum of 25 points.
My rating system maps to different quality score ranges. Ratings are Exceptional (25), Excellent (23-24), Fine (19-22), Decent (15-18), Poor (10-14), and Inferior (0-9). Furthermore, Investment Grade ratings correspond to quality scores in the range 15-25, while Speculative Grade ratings have quality scores below 15 points.
DVK Quality Snapshots scoring system and my rating system
To rank stocks, I sort them by quality score and break ties by considering up to three factors, in turn:
When two stocks with the same quality score have the same Dividend Safety Score, I next compare their S&P Credit Ratings, ranking the one with the better Credit Rating higher. I rarely need to break ties with the Dividend Yield.
The following sections present all 65 Dividend Aristocrats ranked by quality score.
Each table presents key metrics of interest to dividend growth [DG] investors, along with quality indicators and my fair value estimates:
I'm also providing a downloadable spreadsheet with fundamental and added value metrics for all Dividend Aristocrats. The spreadsheet includes the data presented in this article but also includes data available to Portfolio Insight subscribers. I hope readers would find this snapshot of fundamental and added value metrics useful in analyzing the Dividend Aristocrats.
To estimate fair value, I reference fair value estimates and price targets from several sources, including Morningstar and Finbox.io. Additionally, I estimate fair value using the 5-year average dividend yield of each stock using data from Simply Safe Dividends. With several estimates and targets available, I ignore the outliers (the lowest and highest values) and use the average of the median and mean of the remaining values as my fair value estimate.
I color-code the CDN column to indicate the likelihood that the stock will deliver annualized returns of at least 8%. Green means likely, yellow means less-likely, and red means unlikely. I consider green CDNs favorable.
The first table contains the highest-quality Dividend Aristocrats. These stocks have perfect quality scores, having scored the maximum possible points for all quality indicators.
Please note that stocks I own are highlighted in the Ticker column.
|1||Johnson & Johnson (JNJ)||Health Care||Defensive|
|2||The Procter & Gamble Company (PG)||Consumer Staples||Defensive|
|3||Automatic Data Processing, Inc. (ADP)||Information Technology||Sensitive|
The next table contains high-quality Dividend Aristocrats with quality scores of 23-24.
|4||Medtronic plc (MDT)||Health Care||Defensive|
|5||General Dynamics Corporation (GD)||Industrials||Sensitive|
|6||PepsiCo, Inc. (PEP)||Consumer Staples||Defensive|
|7||Colgate-Palmolive Company (CL)||Consumer Staples||Defensive|
|8||Walmart Inc. (WMT)||Consumer Staples||Defensive|
|9||Ecolab Inc. (ECL)||Materials||Cyclical|
|10||Air Products and Chemicals, Inc. (APD)||Materials||Cyclical|
|11||Illinois Tool Works Inc. (ITW)||Industrials||Sensitive|
|12||The Coca-Cola Company (KO)||Consumer Staples||Defensive|
|13||Emerson Electric Co. (EMR)||Industrials||Sensitive|
|14||3M Company (MMM)||Industrials||Sensitive|
The next table contains quality stocks with quality scores of 19-22.
|15||W.W. Grainger, Inc. (GWW)||Industrials||Sensitive|
|16||Hormel Foods Corporation (HRL)||Consumer Staples||Defensive|
|17||Chubb Limited (CB)||Financials||Cyclical|
|18||NextEra Energy, Inc. (NEE)||Utilities||Defensive|
|19||Brown-Forman Corporation (BF.B)||Consumer Staples||Defensive|
|20||Roper Technologies, Inc. (ROP)||Industrials||Sensitive|
|21||Atmos Energy Corporation (ATO)||Utilities||Defensive|
|22||T. Rowe Price Group, Inc. (TROW)||Financials||Cyclical|
|23||Caterpillar Inc. (CAT)||Industrials||Sensitive|
|24||Lowe's Companies, Inc. (LOW)||Consumer Discretionary||Cyclical|
|25||Becton, Dickinson, and Company (BDX)||Health Care||Defensive|
|26||Kimberly-Clark Corporation (KMB)||Consumer Staples||Defensive|
|27||McDonald's Corporation (MCD)||Consumer Discretionary||Cyclical|
|28||Abbott Laboratories (ABT)||Health Care||Defensive|
|29||Cintas Corporation (CTAS)||Industrials||Sensitive|
|30||PPG Industries, Inc. (PPG)||Materials||Cyclical|
|31||Dover Corporation (DOV)||Industrials||Sensitive|
|32||The Sherwin-Williams Company (SHW)||Materials||Cyclical|
|33||McCormick & Company, Incorporated (MKC)||Consumer Staples||Defensive|
|34||The Clorox Company (CLX)||Consumer Staples||Defensive|
|35||AT&T Inc. (T)||Communication Services||Sensitive|
|36||Consolidated Edison, Inc. (ED)||Utilities||Defensive|
|37||Franklin Resources, Inc. (BEN)||Financials||Cyclical|
|38||International Business Machines Corporation (IBM)||Information Technology||Sensitive|
|39||Expeditors International of Washington, Inc. (EXPD)||Industrials||Sensitive|
|40||Archer-Daniels-Midland Company (ADM)||Consumer Staples||Defensive|
The next table contains lower-quality stocks with quality scores of 15-28.
|41||Linde plc (LIN)||Materials||Cyclical|
|42||Aflac Incorporated (AFL)||Financials||Cyclical|
|43||A. O. Smith Corporation (AOS)||Industrials||Sensitive|
|44||Target Corporation (TGT)||Consumer Discretionary||Cyclical|
|45||V.F. Corporation (VFC)||Consumer Discretionary||Cyclical|
|46||Chevron Corporation (CVX)||Energy||Sensitive|
|47||Albemarle Corporation (ALB)||Materials||Cyclical|
|48||S&P Global Inc. (SPGI)||Financials||Cyclical|
|49||West Pharmaceutical Services, Inc. (WST)||Health Care||Defensive|
|50||Stanley Black & Decker, Inc. (SWK)||Industrials||Sensitive|
|51||Nucor Corporation (NUE)||Materials||Cyclical|
|52||Pentair plc (PNR)||Industrials||Sensitive|
|53||Walgreens Boots Alliance, Inc. (WBA)||Consumer Staples||Defensive|
|54||Cardinal Health, Inc. (CAH)||Health Care||Defensive|
|55||Sysco Corporation (SYY)||Consumer Staples||Defensive|
|56||Exxon Mobil Corporation (XOM)||Energy||Sensitive|
|57||Leggett & Platt, Incorporated (LEG)||Consumer Discretionary||Cyclical|
|58||Federal Realty Investment Trust (FRT)||Real Estate||Cyclical|
|59||AbbVie Inc. (ABBV)||Health Care||Defensive|
|60||Essex Property Trust, Inc. (ESS)||Real Estate||Cyclical|
|61||Realty Income Corporation (O)||Real Estate||Cyclical|
|62||Amcor plc (AMCR)||Materials||Cyclical|
The stocks in the last table are the lowest-quality Dividend Aristocrats and stocks I consider to be speculative-grade.
|63||People's United Financial, Inc. (PBCT)||Financials||Cyclical|
|64||Cincinnati Financial Corporation (CINF)||Financials||Cyclical|
|65||Genuine Parts Company (GPC)||Consumer Discretionary||Cyclical|
Let's use some screens to isolate investment-grade Dividend Aristocrats offering favorable valuations and compelling metrics.
For me, a favorable valuation depends on the quality of the stock. I recognize that the highest-quality dividend growth [DG] stocks rarely trade at discounted valuations, so I'm willing to pay a bit of a premium price for such stocks.
Here are my quality/valuation screens:
|Exceptional||25||Allow a premium of up to 10%|
|Excellent||23-24||Allow a premium of up to 5%|
|Fine||19-22||Require fair value or below|
|Decent||15-18||Require a discount of at least 10%|
Applying these screens creates a subset of Dividend Aristocrats I call Aristocrats-Opportunities, the basis of additional screens presented below.
As for compelling metrics, I like having a good mix of higher-yielding and higher DGR stocks in my portfolio. It is rare to see a stock offering both. Consider the following dividend quadrant, comparing the dividend yield to the 5-year dividend growth rate for all Aristocrats-Opportunities stocks:
Source: Portfolio Insight
Notice that only two Dividend Aristocrats, ABBV and BEN, fall into the high yield/high growth quadrant.
To highlight the best opportunities, I use the CDN (the sum of the stock's current yield and its 5-year DGR) as a guide, favoring CDNs that are colored green in the summary tables (see this article for an explanation of my color-coding scheme).
When stocks trade at a discount to fair value, early investors will benefit when the market finally recognizes those stocks' true value. So it is worthwhile to consider the highest discounts among the Dividend Aristocrats.
I strongly favor DG stocks that are deemed Very Safe or Safe by Simply Safe Dividends. Nobody likes seeing a dividend cut or suspension soon after investing in a DG stock, so targeting the safest candidates is a good strategy.
Finally, while it remains true that past performance is no guarantee of future results, I like to look at the 5-Yr TTR. There's something to be said for momentum, especially for stable, blue-chip dividend growth companies.
With these observations in mind, let's consider the top stocks in several categories:
The highest-yielding stocks all trade at discounted valuations. T top the list and, except for a brief period last year when XOM took the top spot, T has been the top-yielding Dividend Aristocrat for many years:
Source: Portfolio Insight
Except for ABBV and BEN, I'm not impressed by the 5-year DGRs of these high-yielding stocks. As a defensive stock in the Utilities sector, ED looks interesting, though, offering a reasonably high yield and growing its dividend at a rate that at least beats the rate of inflation. ABBV is the top-performing stock over the last five years among the highest yielders and perhaps deserves a look, despite its lower quality score.
Highest Dividend Growth Rates
I already mentioned ABBV as a stock deserving of consideration. Two stocks with higher quality scores also are worth considering, ITW and ADP. These stocks not only have strong 5-yr DGRs but have returned nearly 20% annually in the last five years!
The same cannot be said about BEN, a notoriously poor performer for at least six years. However, as mentioned, BEN is one of only two stocks offering a high yield/high DGR combination. I also like TROW and recently highlighted the stock as a buy below $167 per share.
Highest Chowder Numbers
As mentioned earlier, I use the CDN as a guide and often favor those colored green in my summary tables. Such stocks are likely to deliver annualized returns of at least 8%, provided they continue to increase their dividends at similar rates. Once again, ABBV needs a mention, as do ITW and ADP with their higher quality scores. Investors looking for more defensive exposure should also consider ED, one of the highest yielding Dividend Aristocrats.
Source: Portfolio Insight
In the chart above, we compare ED's 10-year performance to those of the other Aristocrats-Opportunities. While ED falls in the bottom quartile, it is informative to note that ED's 10-Yr TTR is 8.01%, which essentially matches the stock's CDN.
Most Discounted Stocks
Stocks available at deep discounts need special scrutiny as there may be good reasons for their undervaluations. This is particularly true for stocks with poor historical performance, such as those with negative 5-Yr TTRs. ABBV is an exception here, with a strong 5-Yr TTR of almost 18%.
The dividend yield history chart of ABBV confirms that the stock is trading at a discount, at least based on historical yields. The stock's current yield is attractive compared to the 5-Yr average yield.
The safest stocks have modest yields, and only two offer favorable CDNs, ROP and ADP. ROP's yield is too low for most dividend growth investors to even consider, but notice how well the stock has performed when compared with the other Dividend Aristocrats, based on total returns over the past 10 years:
Source: Portfolio Insight
Perhaps this is a convenient reminder that some stocks have low yields, not because of a stingy dividend policy, but because of share price appreciation partly driven by strong dividend growth.
Highest Total Trailing Returns
The final screen considers the top-performing stocks based on 5-Yr TTRs. While ITW currently tops the list, TROW held the top ranking at the end of 2020:
Source: Portfolio Insight
The comparison heatmap shows that TROW has been at or near the top in all four performance metrics over the past 10 years!
DVK Quality Snapshots provide a convenient and effective method to assess the quality of dividend growth stocks. Of the 65 Dividend Aristocrats, all but three have investment-grade ratings based on their quality scores of 15-25. No fewer than 40 Dividend Aristocrats have quality scores in the 19-25 range. These truly are high-quality stocks!
I've highlighted several stocks trading at favorable valuations and offering compelling metrics:
I own all of these stocks except ED and ROP.
As always, I encourage readers to do their own due diligence before investing.
Thanks for reading, and happy investing!
Access a Google spreadsheet of the Dividend Aristocrats
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This article was written by
Disclosure: I am/we are long JNJ, PG, ADP, MDT, GD, PEP, APD, ITW, KO, MMM, HRL, CB, NEE, TROW, LOW, MCD, T, BEN, IBM, ADM, AFL, CVX, O. 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.