These Companies Deserve Income Investors’ Attention
Regular readers of Income Investors would know that I profile a lot of high-yield stocks. Some I find worth considering, others not so much. Today, however, I want to talk about a group of stocks that are quite a bit different. The yield on these investments may not look very attractive in the short term, but they can be instrumental in creating wealth in the long run.
I’m talking about the S&P “dividend aristocrats,” which are companies on the S&P 500 Index with at least 25 consecutive years of annual dividend increases.
The first thing you’ll notice is that there are not a lot of them. With all the ups and downs of the economy, most companies would be proud to have a decade of annual dividend increases. Being able to do that for a quarter of a century is no easy feat. In fact, only 51 companies currently hold that title. You can see the full list of 51 S&P dividend aristocrats here.
The second thing you’ll notice is that many of these companies are household names, such as The Coca-Cola Co (NYSE:KO), McDonald’s Corporation (NYSE:MCD), and Wal-Mart Stores Inc (NYSE:WMT). This shouldn’t come as a surprise. In order to be able to raise dividends through thick and thin, a company needs to be able to generate a recurring business. And having a deeply entrenched market position would allow companies to do that.
The big question, of course, is whether they are worth owning for yield-seeking investors. Because these companies are highly sought after, investors have bid up their prices during the latest round of rallies in the U.S. stock market. And since dividend yield moves inversely to share price, increased investor enthusiasm towards dividend aristocrats means they no longer offer attractive yields.
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In fact, the highest-yielding name on the list, AT&T Inc. (NYSE:T), currently pays 5.74%. And if you purchase ProShares S&P 500 Dividend Aristocrats ETF (NYSEARCA:NOBL), an exchange-traded fund (ETF) that tracks the S&P 500 Dividend Aristocrats Index and holds the exact 51 dividend aristocrat companies, you would be earning a yield of 1.93%. (Source: “S&P 500 Dividend Aristocrats ETF,” ProShares, last accessed November 13, 2017.)
In other words, for investors who want to boost the dividend yield of their portfolio, most dividend aristocrats would not really do the job. What they can provide, however, is dividend safety.
As I mentioned earlier, dividend aristocrats tend to have established market positions. These positions are often backed by durable competitive advantage. Even though their share prices may not shoot through the roof, these companies are here to stay.
At the same time, dividend aristocrats have shown that they are willing to return value to shareholders. With such amazing track records, management will likely want to keep the dividend increases continue. So in the future, there’s a good chance that investors of dividend aristocrats would collect higher payouts.
To conclude, dividend aristocrats are not the highest-yielding stocks, but they stand out due to dividend safety and growth. It’s the main reason why we have recommended quite a few of them in our Income for Life advisory over the last several years. And just as we expected, those companies continued their track record and delivered outstanding returns. PepsiCo, Inc. (NYSE:PEP), for instance, delivered a total return of 145.5% (assuming automatic dividend reinvestment) since our recommendation in August 2009. And Johnson & Johnson (NYSE:JNJ) returned 154.8% since it was recommended in February 2012.