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3 Dividend Aristocrats You Can Safely Buy That Are Set To Fly

Mar. 04, 2021 5:45 AM ETMO, PII, WBA102 Comments


  • Stocks have roared higher at 4X their historical rate in recent months. The S&P 500 is 35% overvalued, the dividend aristocrats 15% overvalued.
  • Fortunately, blue-chip bargains are always available if you know where to look. Here, I highlight the safest and best aristocrats for any goal and need.
  • MO, WBA, and PII represent the best yield, value, and long-term growth potential among the dividend aristocrats and champions.
  • Each trades at a reasonable to attractive valuation, has safe or very safe dividends expected to grow steadily over time faster than inflation, and market-beating return potentials.
  • In fact, in the next few years, each of these aristocrats is capable of outperforming the 35% overvalued S&P 500 by 15 to 30X. Within a well-diversified and prudently risk-managed portfolio, these three companies represent the kind of disciplined financial science that can help you achieve a rich retirement.
  • I do much more than just articles at The Dividend Kings: Members get access to model portfolios, regular updates, a chat room, and more. Get started today »

The market has been red hot since the news of the Pfizer (PFE) vaccine broke in early November.

The market has been rising at 4X the historical rate ever since. Now concerns over rising interest rates have many worried that various speculative bubbles might be about to pop.

S&P 500 Total Return Consensus Forecast

Year Upside Potential By End of That Year Consensus CAGR Return Potential By End of That Year

Probability-Weighted Return (Annualized)

2021 -23.20% -27.10% -20.30%
2022 -9.90% -5.50% -4.10%
2023 2.50% 0.89% 0.67%
2026 36.02% 5.41% 3.28%

(Source: Dividend Kings S&P 500 Valuation & Total Return Tool)

While long-term buy and hold index investors are not likely facing a lost decade, returns could be very weak for a long time. And of course, short-term volatility could be nasty.

Even the legendary dividend aristocrats are not necessarily a safe place to park your money right now.

  • Since November, aristocrats have been rising at 2X their historical rate
  • Today, they are 15% overvalued as a group
  • Vs 35% overvalued for the S&P 500

Dividend Aristocrats Vs S&P 500 Since 1990

Year Aristocrats Returns Cumulative Returns S&P 500 Total Returns

Cumulative Returns

1990 5.70% 105.70% -3.2% 96.8%
1991 38.50% 146.4% 30.4% 126.2%
1992 10.10% 161.2% 7.6% 135.8%
1993 4.30% 168.1% 10.1% 149.5%
1994 0.90% 169.6% 1.3% 151.5%
1995 34.60% 228.3% 37.6% 208.4%
1996 20.90% 276.0% 22.9% 256.2%
1997 34.50% 371.3% 33.3% 341.5%
1998 16.80% 433.6% 28.6% 439.1%
1999 -5.40% 410.2% 21.0% 531.4%
2000 10.10% 451.7% -9.1% 483.0%
2001 10.80% 500.4% -11.9% 425.5%
2002 -9.90% 450.9% -22.1% 331.5%
2003 25.40% 565.4% 28.7% 426.6%
2004 15.50% 653.1% 10.9% 473.1%
2005 3.70% 677.2% 4.9% 496.3%
2006 17.30% 794.4% 15.8% 574.7%


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This article was written by

Dividend Sensei profile picture

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, WBA, PII. 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 own MO, WBA, and PII 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 (102)

abdulmoiz1254 profile picture
As an ex heroin addict and pretty heavy smoker
Who will probably do heroin if offered (or alcohol or cannabis for that matter)
But scoff at the thought of cigarettes ...I think smokes don't have a future
scottiebumich profile picture
Seems BTI is a better play (for international exposure). Their top line seems to perform better (which is important in decreasing market). They haven't made horrible investments like MO has (Juul, Wine, etc.). I hold both but 2x more in BTI.
Dividend Sensei profile picture
@scottiebumich I'm similar. I've bought about $17K in MO and $33K worth of BTI.

Mostly because BTI was more undervalued, so on my limit priority list longer.

And as long as BTI is the most undervalued blue-chip on Wall Street I'll keep buying a little bit every 4th market day.

And every new market pullback/correction I reset my limits and chase my highest conviction ideas to bottom.

Not much action for BTI this time. Mostly tech got smashed, so I ended up buying a small fortune worth of Amazon and BABA.
@Dividend Sensei same! BABA and AMZN
Incomeiam profile picture
Mo, bti, pm, cvx, enb, xom, vlo! Great anchors in my ira. Killing it this year!!
lake42ofus profile picture
Thanks DS!
connjoltrane profile picture
Altria may be a good short-term income generator, but it's hard to see it as a long-term compounder that you can set and forget. To call it a "12/12 Ultra SWAN" is laughable.

As top-line growth is in the low single digits, debt will continue to be used for acquisitions and to service dividend growth. Currently the dividend and interest expenses take up 65% of operating income. What happens if the company starts to see declining revenues and profits? It will be forced to take on more debt and eventually cut its dividend. There isn't much wiggle room, and it's over the long-term unsustainable in the current way they are doing things.

Now if people understand that and want to collect some yield while keeping a close eye out for trouble, sure. But to tell everyone this is a Sleep Well At Night stock like and an Apple or a Microsoft, that's very misleading.
Dividend Sensei profile picture
@connjoltrane The 12/12 quality is based on a 137 fundamental metric model.

DK overall quality scores factor in over 100 fundamental metrics covering

dividend safety

balance sheet strength

short and long-term bankruptcy risk

accounting and corporate fraud risk

profitability and business model

long-term sustainability (ESG scores and trends from MSCI, Morningstar, and Reuters'/Refinitiv)

management quality

dividend friendly corporate culture/income dependability

Growth consensus estimates from 4 sources and historical margins of error on those estimates are some of the fundamentals we consider when determining safety, dependability, and overall quality scores.
connjoltrane profile picture
@Dividend Sensei you have to understand the business model and how much cash flows they have to support the dividend. If their cash flows happen to drop, even temporarily, or interest rates go higher and their interest expenses increase, they could be forced to cut the dividend.

You can rationalize a lot of things with "scores" and "numbers" but that underlying reality is still there in their business and financials.
@connjoltrane Altria can raise prices on tobacco for a long long time. Also, it shouldn't be left out how big the marijuana industry will be once federally legal, MO is already working with regulators about smokeable products. Also the 13 billion dollar stake in BUD is tradable come October so they have that at their disposal too. MO will be fine long term
So what is this obsession with Dividend Aristocrats?

Reliable and growing dividends are a sign of financial stability and shareholder friendly Managment. Got that. I tend to be a buy and hold guy. But what is the significance of some artificial, commercial, trademarked status?

The DA designation is subject to survivor bias. If the future is anything like the past, half the companies listed today as Dividend Aristocrats will lose that status in the next 20 years.
Something like half the DA’s today were not on the DA list 10 years ago.

So what is the point of factoring DA status into a buy/sell rating?

Why is it that no one other than amateur investors, not WS analysts, valuation professionals, nor financials scholars, ever refer to it (DA) in their analyses or valuation models.
You cannot find the term “Dividend Aristocrat” in any credible grad school financial textbook or professional research article. Period. Zero.
Dividend Sensei profile picture
@Current$ea NOBL rebalances every year, adding or removing companies as needed.

The alpha factor studies take survivorship bias into account.

In the 2020 pandemic companies with 12+ year growth streaks were many times less likely to cut their dividends.

Dividend aristocrats are not an alpha factor, dividend growth is.

And aristocrats, champions, and kings are the most dependable of all dividend growth stocks.
cigarettes and brick & mortar retailer?
No thanks
Dividend Sensei profile picture
@Luculus To each their own.

No company is right for everyone.

That's why each company-specific article I do has a risk section entitled

"Risk Profile: Why Company X Isn't Right For Everyone"

I personally don't like or invest in automakers, steel makers, or shippers.
I personally prefer CVS over Walgreens but good article none the less!
Two of these companies are hollowed out debt queens. I think Altia is running 15+ turns of financial leverage. Walgreens is a mess. Polaris is the only legit deal but it's priced up now and no bargain here - not even close.
Dividend Sensei profile picture

According to my FactSet Research Terminal

MO's TTM debt/EBITDA: 1.91X

consensus 12-month forward leverage: 2.51 X

net debt/EBITDA: 1.6X

According to rating agencies 3.0 or less is safe in this industry.

PII's historical fair value is 17 to 19 PE, so 18X = fair value.

Buy a company growing at 16% with a 2% yield at fair value and you'll potentially make 18% CAGR over time.
@Dividend Sensei - better go back to your texbooks, pal.. What you've described is not financial leverage - at least not the kind that matters when the rubber hits the road - MO is running at 15 turns - live with it.
Dividend Sensei profile picture

S&P, Fitch, and Moody's disagree with you.
kingg33 profile picture
For those interested in/concerned about ESG ratings, WBA ranks among the ten best global corporate leaders in terms of reporting, etc.www.bloomberg.com/...
Dividend Sensei profile picture
@kingg33 There is no standardized ESG reporting method, thus why the correlation between ESG risk scores is 64% vs 99% for credit ratings.

And why I use 3 rating agencies to get ESG risk scores.

That way I can get a consensus.

If a company is rated at least average by all 3, or above-average by 2 or more, then the company is in the top 26% of its peers.

And makes our upcoming strong ESG watchlist, coming later this year to DK.
Just as a new guy on the block, it’s really hard to pull the trigger on a company almost solely reliant on smoking. Why did they not position themselves in the marijuana game with pre rolled joints or something? Sell them in packs like cigarettes.
This is the opposite of a company like PLTR right? One has the future AI tech but does not have the customer base while this old lady has the customer base but future is dull.
Eileen Dover profile picture
@MaineSkin MO is positioned for marijuana with a holding in Cronos. They also own 10.1% of BUD. People stuck at home from Covid must be smoking and drinking more.
@MaineSkin Go with your gut. Don't do it. There's plenty of companies out there.
@MaineSkin there is no future in these aging tobacco companies. Zero.
Buy HD
Dividend Sensei profile picture
@Fred Ziffel A fine company, that I own.

But not an aristocrat.

LOW's is a dividend king and I bought some during this pullback.

I'll do an article in a few weeks explaining why.
@Dividend Sensei I think there needs to be an article about how massive influence is being used to pull back and make runs in certain companies if not sectors. Should their be a retail trader buffer? Of course I think there should be total access and information but after hearing Robinhood is owned by a Fund which is owned by another Fund and they use it all together to trade on a massive crowd source type strategy, just tells me the retail traders are being used even if some make a little money. Most are not.
That or I am to green which I am but I am smart and it seems like social media and media in general are manipulating the markets at a level that has me backing off. I dumped it into BABA apologizing to my inner populist bc it seems safe. CCP uses it as a weapon so maybe Ma disappears but CCP will just force it to grow for investors.
I own MO and would love to double down but when I look at the 5 year chart it doesn't exude confidence. As for WBA it seems like they've been waiting for liftoff for a while now, maybe they never will?
Dividend Sensei profile picture

Ignore the price and look at fundamentals.

Has MO's earnings grown every year since the bear market began? Yes.

Has the dividend? Yes

Do analysts expect it to keep growing? Yes.

When fundamentals are rising and the stock price is falling, that's an irrational market.

OR a bubble stocks whose bubble has popped.

In 2017 MO was 60% overvalued.

Anyone who bought at 24X earnings and is down has suffered valuation risk.

No prudent pays 24X earnings for a company historically valued at 14 to 16X.

A poor return from 60% overvalued, almost Tech bubble levels of hysterical excess, is not an indication that something is wrong with the company.

"1: Most things will prove to be cyclical. – Rule No. 2: Some of the greatest opportunities for gain and loss come when other people forget Rule No.1." - Howard Marks

The idiot buys MO after it's been a wall street darling for 5 years and is trading at its highest valuation in history.

The prudent investor starts buying when the bubble has burst, and keeps buying as long as the price drops despite objectively strong fundamentals.

The lower the valuation the higher the margin of safety, as long as fundamentals are intact.

It's basic financial science and it's what the greatest investors in history used to become legends and extremely wealthy.
Hey Dividend Sensei! Like your. Work and appreciate your sharing.

Two things:
(1) I know you do financial analysis, I understand that, but sometimes for some companies, the market undergoes a fundamental and sometimes irrevocable change.

WBA may be one. It is not a speculative turnaround as you say. They are being aggressively dis-intermediated out of their industry. Retail pharmacy/PBM is raw meat target for every consulting firm and new AI technology out there. And that’s before Amazon moves in on their brick and mortar business.

Which brings me to the second thing...

(2) The article title “Aristocrats...Set to Fly”?
Even if I am wrong about WBA, one cannot responsibly describe it as a company as “Set to Fly.” Your business strategy can either go for click bait or authenticity and credibility. You cannot have it both ways.
@Current$ea well said. Great reply. Couldn't agree more
@Current$ea, if brick and mortar retail is destined for extinction, why is Amazon investing in it?
Because it (b&m pharmacy retail) is now a very low margin, high volume business requiring very high asset turnover. Grocery store - not growth.

Reasons for Amazon adding WBA to their “portfolio” do not apply to individual investors. Amazon, as an operator, can achieve synergies, e.g., economies of scale, may see strategic value to defend larger grocery business, etc.

If anything, reason to buy AMZN, not WBA. If WBA was “cheap”, AMZN would buy it.

My point being, WBA is not exactly “set to fly.”
PB Grossman profile picture
Loved the list of GOATS! Thank you, DS----
Oh look, another Dividend Sensei article that the Dividend Aristocrat list is an exercise in survivorship bias.
Dividend Sensei profile picture
@phexac The dividend growth factor was discovered by Fama, confirmed by Research Affiliates and Ned Davis Research.

Aristocrats are just the most famous example of dividend growth stocks outperforming over time.
@Dividend Sensei

Especially, if you keep excluding all the underperformers, as the dividend aristocrat list does.
Dividend Sensei profile picture
@phexac alpha-factor studies make the necessary adjustments to minimize survivorship bias.
Greenhorn Investor profile picture
Thanks @Dividend Sensei Even in a market that has run as hot as this one has, there are opportunities iMO.
Thanks DS. Many of us are struggling with the decision of WBA or CVS, MO or BTI....so far my answer has been CVS and to own MO and BTI. Perhaps an article on these two pairs would be something to consider. thanks.
Dividend Sensei profile picture
@tman1 I own both though WBA is the one I was buying in late 2020 during its freakout.

The growth consensus on both is 3.4%.

Management guidance at CVS 10% to 12% and WBA 4% to 6%.

CVS's business model has the easier job of delivering stronger growth.
@tman1, I agree. I own $MO and $BTI, just buy them both. As for the other pair, I only own $CVS. No way I would buy $WBA.
Eileen Dover profile picture
@G-man$$ Why don't you own PM too?
Everyone always points to MO as a value dividend play but I struggle to get past the 9.85 debt to equity ratio.

That is true for me, plus consumer preferences are changing. Traditional cigarettes are slowing, and the pricing power to make-up for lower sales isn't infinite.

If weed is legalized though, it could really do well.
Dividend Sensei profile picture

Remember that buybacks reduce equity due to treasury stock.

$34.4 billion in treasury stock on the balance sheet.

Which is not an actual liability but an asset they can convert to cash if they needed to.

Adjust for the treasury stock and debt/capital is 35% vs 60% safety guideline according to rating agencies.

There is a reason S&P and Moody's rate MO BBB stable, and A- stable, respectively.

Fitch rates it BBB stable.
Dividend Sensei profile picture
@cat2005 Cigarette volumes falling for over 50 consecutive years.

Tobacco companies have said their plan is post tobacco future, and all 3 big names are executing on a smoke-free future.

The CEOs of all tobacco companies are the first to admit that eventually, no one will smoke.

They've been planning for that, as all good companies do.
Dividend aristocrats are fine but you need to ensure that the company is generating sufficient cash flow to fund the dividend in line with its historical payout ratios. I sort of shudder when I read that a company is "the best to buy in 2021" or a company is "set to fly". Does this mean that there were better companies last year and next year other companies will be better? If you're buying pieces of paper rather than investments in a company, market timing is fine. Rather than looking at charts and near term projections, real money is made in buying only the best companies and holding them very long term or preferably forever. Such companies may not reflect the stock du jour but rather the stock to own for decades to come. MO certainly does not represent such a company though it could reinvent itself (with a new management team) in the future. WBA, despite its dividend aristocratic status has not made for a great investment in a long time. The question is, do you want to own great, innovative companies or do you want to own companies with a nice past that likely will not return to their glory days? All too often dividend aristocrats raise their dividend by a penny or two each year just to retain their status as "aristocrats" while their businesses (and stock prices) stagnate. Building wealth requires total return, not merely dividends. With interest rates hovering at historical lows for more than a decade, prices of dividend aristocrats are probably inflated at today's prices due to people looking for bond replacements. I'd look elsewhere.
Dividend Sensei profile picture
@Stephenbakerlaw As the video explains, the screen includes quality and safety.

WBA is a speculative 9/12 blue-chip aristocrat.

MO is a 12/12 Ultra SWAN dividend king

PII is a 12/12 Ultra SWAN dividend champion.

I've invested about $40K into these three companies.

With no plans to flip anything for a quick profit.

I buy with the intention of holding for decades and collecting my dividends.

Even the growth stocks I buy, such as AMZN, BABA, GOOG, CRM, etc, I buy because I eventually expect them to be paying me dividends.
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