Investors looking for the highest-quality dividend growth stocks to buy and hold for the long term should consider the Dividend Aristocrats.
By Bob Ciura for Sure Dividend
Investors looking for the highest-quality dividend growth stocks to buy and hold for the long term should consider the Dividend Aristocrats.
These stocks belong to an exclusive group of just 66 companies in the S&P 500 Index, which have each raised their dividends for at least 25 consecutive years.
We believe the Dividend Aristocrats represent attractive long-term investments because they possess durable competitive advantages that allow them to generate steady growth even through recessions. In turn, this gives them the ability to grow their dividends each year.
This article will discuss why income investors should take a closer look at the Dividend Aristocrats, and the top 3 Dividend Aristocrats now.
Dividend Aristocrats Overview
Put simply, dividends matter--according to Standard & Poor's, dividends have contributed one-third of all stock market returns since 1926 (capital gains have contributed the other two-thirds). And, the Dividend Aristocrats offer a much higher yield than the broader S&P 500 Index. Consider that the major exchange-traded fund that tracks the Dividend Aristocrats, which trades under the stock symbol NOBL, has an average dividend yield of 2%, compared with an average yield of just 1.3% for the S&P 500.
To be a Dividend Aristocrat, a stock must satisfy a set of requirements. Not only do they need to raise their dividends for 25+ consecutive years, but they also must be included in the S&P 500 Index. Beyond that, constituents must have a float-adjusted market cap above $3 billion, and an average daily value traded of at least $5 million for the three months prior to the rebalancing date.
It is relatively difficult to raise dividends for 25 consecutive years without interruption, as a company needs the ability to continue raising dividends through recessions and other challenges. There are only 66 stocks on the list of Dividend Aristocrats, compared with over 500 stocks in the S&P 500 Index. A few of the stocks on the list of Dividend Aristocrats include Johnson & Johnson (JNJ), Walmart Inc. (WMT), and McDonald's (MCD).
The Dividend Aristocrats tend to outperform the S&P 500 Index during bear markets while exhibiting lower volatility than the broader market. This is because companies that have grown their dividends for 25 consecutive years tend to have strong balance sheets and good fiscal corporate governance. This means investors looking for less volatility in their stock portfolio with higher levels of income, may see a lot to like about the Dividend Aristocrats.
Even better, investors can single out the Dividend Aristocrats that are also trading at attractive valuations. This could provide superior long-term returns, in the form of capital gains and dividends. Therefore, we believe the following 3 stocks are the top Dividend Aristocrats right now.
Dividend Aristocrat #1: 3M Company (MMM)
3M is a company that virtually all investors are likely familiar with. It is a giant industrial conglomerate, with more than 60,000 products that are used every day around the world. 3M operates four segments: Safety & Industrial, Healthcare, Transportation & Electronics, and Consumer products.
3M has rebounded from the difficult conditions of the coronavirus pandemic. In 2021, 3M grew revenue and earnings-per-share by 10% and 8%, respectively. This steady growth allowed the company to continue increasing its dividend each year, even during the pandemic. In all, 3M has increased its dividend for over 60 consecutive years. Not only is 3M a Dividend Aristocrat, it is also a Dividend King.
3M is not recession-proof, but the company has proven itself to be resilient during the difficult times in the economic cycle. A big reason for its long-term growth is innovation, a major competitive advantage. The company targets R&D spending equivalent to 6% of sales (~$2 billion annually) in order to create new products to meet consumer demand. This spending has proven to be very beneficial to the company as 30% of sales during the last fiscal year were from products that didn't exist five years ago.
Shares currently yield 3.7%.
Dividend Aristocrat #2: Leggett & Platt (LEG)
Leggett & Platt is an engineered products manufacturer. The company's products include furniture, bedding components, store fixtures, die castings, and industrial products. Leggett & Platt has 14 business units.
Like 3M, Leggett & Platt is both a Dividend Aristocrat and a Dividend King, as the company has increased its dividend for 50 consecutive years. This is due to the company's consistent focus on growing sales while maintaining profitability at the same time, which is especially important in times such as these, when inflation is running hot.
For example, Leggett & Platt generated record sales in the fourth quarter of 2021, up 13% from the same period the prior year. Earnings-per-share dipped slightly, as the company encountered steep increases in multiple cost areas. However, 2021 overall was a very strong year for the company. 2021 sales were a record $5.073 billion, a 19% increase from 2020, while EPS was also a record for the year of $2.78.
Looking ahead, the company sees sales of $5.3 billion to $5.6 billion in 2022, along with earnings-per-share in a range of $2.70 to $3.00. Therefore, 2022 should be another year of growth for Leggett & Platt, which should allow the company to keep raising its dividend. Shares currently yield 4.4%.
Dividend Aristocrat #3: Stanley Black & Decker (SWK)
Stanley Black & Decker is a world leader in power tools, hand tools, and related items. The company holds the top global position in tools and storage sales. Stanley Black & Decker is second in the world in the areas of commercial electronic security and engineered fastening.
Last year was an excellent one for the company. In 2021, revenue grew 17% on an organic basis. Adjusted earnings-per-share increased 30% year-over-year. Such strong growth allows the company to raise its dividend at a high level each year. With a payout ratio below 40%, there is plenty of room for continued dividend growth.
The stock has a 1.8% dividend yield, and we expect 8% annual EPS growth. Shares have a 2022 P/E of about 16, which we view as an attractive entry point. With a small boost from an expanding P/E multiple, total returns are expected to exceed 10% per year, an attractive rate of return for the stock.
Final Thoughts
Volatility has spiked in the stock market over the past few months, as inflation presents a challenge for stocks. Investors can protect their purchasing power by investing in stocks with solid dividend yields, and dividend growth each year.
The Dividend Aristocrats are a great place to start, and we believe Stanley Black & Decker, Leggett & Platt, and 3M are the top 3 Dividend Aristocrats right now.
