S&P 500's Best Dividend Aristocrat Stocks To Consider

Jul. 06, 2022 9:15 AM ETAMCR, CAT, CVX, EMR, GD, GPC, IBM, JNJ, MCD, MDT, PG, TGT, VFC, XOM, SHW16 Comments8 Likes
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  • I want to make certain that the Dividend Aristocrat I recommend will provide me with more than dividends.
  • I want stock price appreciation as well.
  • Further, I want limited downside.
  • Knowing that, let’s look at the best S&P 500’s Dividend Aristocrats to consider.
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With inflation touching a multidecade high in 2022 and Fed raising its interest rate by 150 bps in the last few months, it is no surprise that the stock market has corrected significantly and investors are flocking towards safety. Dividend Aristocrats are one such category of stock that has outperformed during the previous period of slowdown.

While passive investors looking to invest in Dividend Aristocrats may be satisfied investing in ETFs like ProShares S&P 500 Dividend Aristocrats ETF (NOBL) which provides exposure to more than 60 Dividend Aristocrats in the S&P 500 (SPY), active investors may benefit from identifying which of these Dividend Aristocrats have the best prospects going forward.

In this article, I have started with over 60 Dividend Aristocrat companies from S&P 500 and screened them using the parameters like revenue and earnings growth prospects, valuation, dividend yield as well as certain qualitative metrics to come up with a list of the five Best Dividend Aristocrats among S&P 500 companies. I have then discussed their fundamental prospects.

The market has corrected significantly and there are several bargain opportunities available in the market. At this point in time, I don't think it makes much sense to buy pricey stocks. So, the first parameter I used to screen is valuations. I have focused only on the stocks trading at less than 20x the current year as well as forward P/E. This means ignoring several high-quality companies like Brown-Forman (BF.B), Clorox (CLX), Cintas (CTAS), Automatic Data Processing (ADP), Sysco (SYY), Colgate-Palmolive (CL), Coca-Cola (KO), McDonald's (MCD), Roper Technologies (ROP), Procter & Gamble (PG), Hormel Foods (HRL), Sherwin-Williams (SHW), Air Products and Chemicals (APD), Abbott Laboratories (ABT), Kimberly-Clark (KMB), and Becton, Dickinson and Co. (BDX). I understand some investors might differ with me saying that these are really good companies and they are trading at higher multiples because they have good businesses. I completely agree with these investors, but the aim of this article is not to find good opportunities; it is to find the best opportunities.

There is also some risk associated with a few of these names. It wouldn't be that simple for Procter & Gamble to raise prices to offset the rising cost of goods sold given the way that inflation is biting consumer wallets. As a result, its margins are anticipated to decline this year. The negative impact of inflation on consumer demand is also visible in McDonald's sales, which are expected to grow by just 0.65% Y/Y this year, according to consensus estimates. McDonald's is also facing long-term threats from changes in consumer food preferences. Its efforts to make its offering more health-conscious were largely unsuccessful, and it is now concentrating on its core menu. Speaking of unhealthy food options, Coca-Cola, the maker of empty-calorie sugary drinks, is also eliminated at this stage. Others, such as Sherwin-Williams, don't have many business-specific issues but are facing macro headwinds from slowing housing and other end markets. I think we are avoiding some risky names by using this valuation criterion. Don't get me wrong, I am not saying these stocks are a sell because of these risks and higher valuations. All I am saying is that they don't qualify as the best Dividend Aristocrats on our list.

The second criterion I used is earnings growth in the current and the next year. I have only shortlisted companies with positive consensus EPS growth forecasts for the current year and the next. This has allowed us to avoid companies like Target (TGT), which are facing significant headwinds from consumer spending cooling off as well as Exxon (XOM) and Chevron (CVX), which are benefiting from high oil prices that may not sustain at these levels. Some readers may argue that oil prices may remain high for a long time and the valuations of these oil companies are cheap. However, no one can deny that there is a risk of oil prices cooling off in the long term if geopolitical tension around Russia eases or some of the Iranian supply comes into the market or President Biden is able to convince Saudi Arabia and other Gulf countries to increase production. There is also a secular long-term threat from electric vehicle adoption. So, while these companies may still be a buy based on valuation and near-term trends, I don't think one can call them the best among S&P 500 Dividend Aristocrats.

My final quantitative screening parameter is the dividend yield. Since dividend yield is one of the primary considerations for most investors purchasing Dividend Aristocrats, it is important that we look for a decent current yield. Given the expectation about Federal Reserve raising rates to 3% by next year, Dividend Aristocrats, in my opinion, should have a yield of at least 2% to be considered among the best. This means rejecting companies with prospects like Pentair (PNR), Walmart (WMT), Lowe’s (LOW), and W.W. Grainger (GWW). They may qualify for the best stock based on other criteria such as long-term growth or valuation, but I believe most investors are looking for a reasonable yield on this list. Using these three quantitative screening criteria, we get the following stocks as contenders for the best Dividend Aristocrats - General Dynamics (GD), Caterpillar (CAT), Emerson Electric (EMR), Johnson & Johnson (JNJ), Genuine Parts Company (GPC), Medtronic (MDT), Amcor (AMCR), V.F. Corporation (VFC), 3M Company (MMM), and International Business Machines (IBM).

In addition to quantitative factors, I have also used some qualitative factors to exclude some stocks. My regular readers know that I like the valuation and growth prospects of 3M Company. While there are legal risks associated with earplugs and PFAS-related lawsuits, I believe some of the investors' concerns are exaggerated. However, there is still considerable uncertainty, and during a slowdown or a bear market, many investors start pricing in the worst-case scenario. Since there are other stocks available without any legal uncertainties, I have excluded 3M Company as well.

Given the impact of inflation on consumer finances, I am also sceptical of consumer discretionary stocks. Due to its exposure to luxury retail, V.F. Corporation is likely to face headwinds. Genuine Parts Company may be impacted as well, as higher gas prices and tighter consumer budgets may reduce miles driven. The company also faces long-term threats from AutoZone (AZO) and O'Reilly (ORLY) gaining market share. So, I have excluded these two as well.

General Dynamics has done well so far this year as geopolitical tensions with Russia turned the focus on defence stocks. It is now trading at a premium to its 5-year average P/E multiple. I usually prefer buying defence stocks during times of peace when they are available at a cheaper valuation. Geopolitics is usually hard to predict which adds to the uncertainty and, hence, I won’t include it in my best Dividend Aristocrat list.

I will also like to exclude Amcor plc. While Amcor is doing alright in terms of business, more than 95% of its sales is derived from consumer end markets, primarily Food and Beverages. As is the case with V.F. Corporation and Genuine Parts Company, with inflationary concerns impacting consumers, the short to medium term outlook isn’t very bright. Also, the growing concerns around single-use plastics, with even emerging countries like India taking steps to ban them, is a risk for the company.

This gives us a final list of the five best dividend stocks in the S&P 500. Below is a look at each of them in detail.

Johnson & Johnson

JNJ is trading at 17.49x FY22 EPS and has a forward dividend yield of 2.52%. Johnson & Johnson is one of the best defensive stocks and the company’s CFO, Joe Wolk’s quote from the last earnings call sums it up,

While many things have changed in the world since our last call (Q4 2021), much has stayed the same for Johnson & Johnson."

Other than adjusting for the 25 cents impact from adverse FX movement, the company's earnings guidance for FY22 remained the same despite the Russia-Ukraine war breaking out, supply chain constraints worsening, Chinese omicron-related lockdown, and other headwinds.

However, being defensive is not the main reason JNJ is one of the best Dividend Aristocrats in the S&P 500. The company's good growth prospects despite its defensive nature are what make it the best.

Last quarter, the company posted adjusted operational sales excluding the net impact of acquisitions and divestitures and currency translation of 7.9% Y/Y with MedTech and Pharmaceuticals growing at 8.6% Y/Y and 9.3% Y/Y, respectively. The company’s near-term prospects look bright with a recovery in procedural surgeries. In its last earnings call, management talked about sequential improvements from February to March and March to April in Procedural Surgeries. This is likely to continue with the economy reopening. Also, while the company may feel the impact of the Chinese lockdown and supply chain woes in Q2 2022, things are improving with the Chinese economy reopening and supply chain constraints easing. This should help 2H 2022.

In the medium term, management is planning to take several steps to create shareholder value. The company is spinning off its consumer division. The MedTech and Pharmaceutical businesses have a good overlap in their customer base, while the dynamics of the consumer business is a bit different. So, separating these two businesses to manage them effectively makes sense. The company's consumer business has exposure to several high-growth categories like skin care, baby care, oral care, and consumer health (OTC), which bodes well for the new company and can help it achieve a better growth rate and valuation compared to other consumer peers. For the remaining business, management has good growth plans. Its target is to increase pharmaceutical sales to ~$60 bn by 2025 based on the existing portfolio and its current pipeline. Management is pretty confident in achieving this target. Jennifer Taubert, the company’s EVP, and worldwide chairman, Pharmaceuticals, recently commented at a conference,

As we think about why we're so confident for the $60 billion, I think the first is when you take a look at our existing portfolio, the assets that we have, the terrific momentum and trajectory that they are on as well as the fact that products like DARZALEX, ERLEADA, TREMFYA, even our long-acting injectable therapies in neuroscience, we continue to build those assets out. They're on a great trajectory, and we believe there's a lot of runway, going into earlier patient populations, advancing combination therapies, et cetera. So we believe that those assets are going to continue to grow. We think that, that business is also de-risked. These are assets that are already on the market. And we've got great insights for the additional indications that are going to come.

Then the second piece is our pipeline. So what we communicated back in November was as many as 14 transformational new assets coming to market across those key therapeutic areas that I mentioned, each having at least $1 billion in peak sales potential and in fact, five that we believe have $5 billion-plus potential. Those five being our BCMA CAR-T, CARVICTY that we actually already got approval for and have launched in the United States this year and just got approval for in EMEA. The next is nipocalimab that we brought in from our Momenta acquisition and where we're currently developing 11 different indications simultaneously. We really believe that this is a pipeline in a product and where we're going to be able to transform autoantibody-driven diseases. And so we're really building that out. We think that, that is going to have a significant impact. The next one is a combination of rybrevant plus lazertinib for EGFR-positive lung cancer. And we think that this regimen has potential to be superior to TAGRISSO and EGFR-positive lung cancer, and we think that, that has very strong potential.“

On the MedTech side, I expect the company to strengthen its competitive position in next-generation technologies and growth areas through multiple M&As. The company had over $30 bn in cash and short-term investment as of the last quarter and its strong balance sheet gives it ample flexibility to pursue its inorganic strategy.

I don’t think these grown prospects are properly getting reflected in the investor's expectations or consensus estimates and there is a possibility of positive surprise and upward revision of estimates as the company continues to execute its plans over the next few years. Apart from solid fundamentals, the technical also looks good with the stock continuing its upward journey and seeing little impact from the recent stock market rout.

International Business Machines Corporation

IBM is trading at 14.41x FY22 consensus EPS estimates and 13.24x FY23 consensus estimates. It has a forward dividend yield of 4.68% which is the highest in my best Dividend Aristocrat list.

After lagging behind its peers for the past several years, the company is now making changes to increase its focus and agility, and build a strong client-centric culture. Some examples of this include putting experiential selling, client engineering and co-creation at the heart of its client engagement model. The company has invested in hundreds of customer success managers to help clients capture more value from its solutions and it has also upgraded workforce skills with fewer generalists and more technical specialists. This is resonating well with clients and client renewal rates increasing and the company’s recurring revenue base growing. In addition, IBM is starting to see signs of sales productivity improvements. This bodes well for future revenue and margin performance.

IBM is also pivoting towards high-growth cloud and AI solutions to address the needs of its customers. Recently, it spun off its low-margin and slow-growing managed infrastructure services business into Kyndryl (KD). Post this spin-off, the company’s revenue mix shifted towards high-growth software and consulting business which will be a tailwind for its revenue growth in the coming years.

In addition to company-specific initiatives, IBM is also poised to benefit from accelerating IT spending by clients who are looking to drive productivity through digitization. The company’s technicals look good as well and the stock hasn’t seen much downside during the recent market correction. I believe there is a good possibility that the stock may see a breakout on the upside after several years of consolidation. I have shared my detailed research on IBM earlier this year which can be found here.

Medtronic plc

MDT is trading at 16.36x FY23 consensus estimates versus its 5-year average of 20.28x. The stock has a forward dividend yield of 2.98%.

Medtronic is the second healthcare company on this list. However, its performance has not been as strong as Johnson & Johnson and its stock has corrected meaningfully since last September. The company’s sales, as well as margins, were adversely impacted by supply chain woes in the last quarter. The company’s surgical innovations business got impacted by chip shortages while rising resin prices also impacted costs. While the company is still likely to face some headwinds from the supply chain in the current quarter, these constraints are easing, which along with easier comparisons should help the company in the back half of this year.

In the long run, the company is working on centralizing the supply chain. One difference between JNJ’s and Medtronic’s supply chain is that Medtronic's supply chain is pretty fragmented and a lot of procurement is done at local levels. This makes it less resilient. So, the company is working towards centralizing it to make it more standardized and get leverage from its scale. The idea is to get significantly more cost of goods sold productivity as well as increase supply chain resiliency. I believe this will be a meaningful driver for the company’s margin and EPS growth in the longer term.

Emerson Electric Co.

EMR is trading at 15.88x FY22 consensus EPS estimates and 14.59x FY23 consensus EPS estimates. This is a discount to its 5-year average forward P/E of 20.74x. The stock has a forward dividend yield of 2.56%.

Emerson is seeing good order activity and has a strong backlog which should help its revenue in the near term. The company was able to deliver ~24% incremental margins last quarter despite supply chain challenges and inflationary pressure. Emerson seems to be benefiting from the cost re-set in the Automation Solutions business over the last several years. With supply chain disruptions easing, I expect the incremental margin to continue improving looking forward. In the long term, the company is set to benefit from emerging trends toward decarbonization and sustainability. The company is looking to use M&As to optimize its portfolio towards higher growth/less volatile offerings which should help it achieve a higher P/E multiple. The recently completed acquisition of Aspen Technology is one such example which should result in a strong industrial software portfolio offering to target customers who are increasingly adopting digitization to improve productivity.

Caterpillar Inc.

CAT is trading at 14.08x FY2022 consensus EPS estimates versus its 5-year average forward P/E of 18.62x. The stock has a forward dividend yield of 2.69%.

Caterpillar has been experiencing strong demand for its products from its end markets, which led to an increase in the backlog by $3.4 bn in the last quarter. Looking forward, the company’s backlog growth should further benefit from the ~$1.2 Trillion Infrastructure Investment and Jobs Act (IIJA) in the U.S., which is expected to flow starting in 2023, and the EU investment package in the EAME region. The higher commodity demand is also driving the production levels at mining companies, benefiting the company’s backlog growth. As the COVID lockdowns in China are lifted and the supply challenges ease, the company’s backlog conversion rate should improve. The other driver of sales growth is the price hikes that the company implemented across its business portfolio to offset the cost pressures. The higher price realization, healthy backlog, strong demand, and easing supply chain constraints should drive the sales growth of the company.

The company's margins are expected to improve in the second half of 2022 as pricing actions continue to take hold. The company has also reaffirmed its target of 300 to 600 basis point improvement in the adjusted operating profit margins versus its historic performance (reference period of 2010 to 2016) and plans to repurchase $15 billion in shares to create value for its shareholders. During the next 3 years, the company plans to increase its dividend annually by at least a high single-digit percentage.

I have discussed the company’s growth prospects in a previous article here.


Dividend Aristocrats are a great addition to one’s retirement portfolio. I have tried to provide a list of Dividend Aristocrats which I believe have good short as well as long-term growth prospects in addition to good yield. This would allow investors to benefit from capital appreciation as well in addition to enjoying regular dividends. I am sure that some of you would also have great dividend ideas. Please feel free to share your thoughts on my best Dividend Aristocrats list as well as your ideas in the comment section below.

This article was written by

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Financial Research firm with focus on industrial,  consumers and technology companies. If you have any questions please feel free to comment on our articles, message us through SA messaging system or drop us an email at gsresearch@ymail.com. We will be happy to respond. Also, please click orange "Follow" button next to our name, if you will like to receive our future ideas.

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. 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.

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