Dividend aristocrats are stocks that have increased in their dividends at least once a year for the last 25 years.
And given that the last 25 years spans both the dot-com bust and the financial crisis, being a member of this elite group of dividend stocks is certainly saying something.
I recently dug into the list of dividend aristocrats and looked for the best potential among this group of income investments, zeroing in on seven top stocks that I think offer investors both stability in their share price, as well as a robust dividend.
After all, some dividend aristocrats may have increased their dividend for each of the last 25 years, but that doesn’t mean they are income machines. Take C.R. Bard (BCR), which has increased payouts for 43 years but only yields a paltry 0.5%. What’s the point of dividend growth if the payouts are that anemic?
If you’re looking for the best dividend aristocrats to buy now — for both current yield, share potential and future dividend growth — I’ve identified seven worth a look. Here they are:
Dividend Aristocrats: Middlesex Water (MSEX)
Dividend Yield: 3.3%
Dividends Since: 1912
Consecutive Dividend Increases: 42
Middlesex Water Company (MSEX) operates water and wastewater systems in New Jersey, Pennsylvania and Delaware. The highly regulated nature of water utilities and the long-term contracts with local governments adds a high level of stability to this stock, guaranteeing reliable revenue and thus reliable dividends for shareholders.
You won’t see a lot of fireworks when it comes to share appreciation, of course, with MSEX stock posting a beta of just 0.65. Furthermore, Middlesex Water is so “boring” that it only trades less than 40,000 shares each day.
But if you’re after income and reliability, you will be hard-pressed to find a better pick for your dividend portfolio than this water utility. MSEX is a dividend aristocrat that has paid distributions to shareholders for over a century, and increases its payouts like clockwork each year.
A guaranteed 3.3% return might not sound like much to day traders, but if you’re after capital preservation and a reliable quarterly paycheck, Middlesex Water is the way to go.
Dividend aristocrats commonly pop up in the utility sector, but water stocks are particularly interesting given the persistent droughts in California and elsewhere that make water infrastructure more important than ever.
Dividend Aristocrats: Questar (STR)
Dividend Yield: 3.9%
Dividends Since: 1935
Consecutive Dividend Increases: 43
Questar (STR) is a natural gas play that focuses on the energy business across the American West. Its four lines of business cover all elements of the supply chain — including gas production via subsidiary Wexpro, transportation and storage via Questar Pipeline, retail distribution via Questar Gas and LNG fleet services via Questar Fueling.
What with the fracking boom across America, natural gas remains cheap and abundant. That has weighed slightly on STR stock, but its integrated business allows this energy play to make up for some lost ground in significantly increased volume. In fact, earnings are set to be basically flat in fiscal 2015 and to rise a decent 5% in 2016 despite soft natural gas pricing.
As for the income side, Questar pays a robust 3.9% yield at current pricing and has been paying back shareholders since before World War II. The dividend is very sustainable, too, at just under two thirds of total earnings.
And as those earnings move up, expect Questar’s dividend to keep growing, too, as it has for 43 years.
Dividend Aristocrats: HCP Inc. (HCP)
Dividend Yield: 6%
Dividends Since: 1985
Consecutive Dividend Increases: 30
Longtime readers of my columns will know that I have been talking up dividend aristocrat HCP Inc. (HCP) for quite some time now. That’s because while HCP is a real estate investment trust — a type of asset that can be sensitive to interest rates — its portfolio of healthcare-related properties makes it a very stable play. Senior-housing facilities, medical offices and hospitals enjoy a recession-proof business that is dictated by the need for care, not cyclical economic trends.
As a result of this reliable revenue, HCP is able to support a big-time dividend that today tallies 6%. That dividend has been paid (and increased once a year) on an uninterrupted basis since 1985. And with adjusted funds from operations at 79 cents a share last quarter, the dividend of 56 cents per share quarterly is quite sustainable at a 71% payout rate.
Now, dividend growth hasn’t burned down the house in recent years and share performance has been sluggish. But what you’re buying in HCP isn’t momentum or the hope of a stock that doubles overnight. Consider the super-low beta of 0.45, indicating this stock “wiggles” less than half as much as the broader market does. That means getting left behind during a mammoth rally, yes, but it also means hanging tough no matter what Wall Street throws your way.
Besides, when you are guaranteed 6% yearly with this REIT via dividends, you don’t need explosive share performance.
And given the long-term demographic trends that will continue to boost demand for healthcare — particularly senior housing as the baby boomers age — there are few stocks that are better positioned for the long haul than this dividend aristocrat.
Dividend Aristocrats: Johnson & Johnson (JNJ)
Dividend Yield: 3.0%
Dividends Since: 1944
Consecutive Dividend Increases: 53
Johnson & Johnson (JNJ) is everything an income investor should love. As a dividend aristocrat, it has a long track record of dividend growth and as an entrenched megacap worth almost $280 billion it has a huge level of stability.
Throw in the fact it is one of only three companies with a AAA credit rating — Microsoft (MSFT) and Exxon Mobil (XOM) are the other two — and you have an incredibly compelling long-term case for this healthcare giant.
Sure, JNJ has been in a bit of a rut for the past year or two, and shares have tacked on a meager 8% since the beginning of 2014 vs. about 15% for the S&P 500. But long-term investors need to think about total return, as well as a time frame of decades, not just years.
While the company ruffled some feathers by offering a rather bleak outlook for 2015 based on the strong dollar holding back sales, its dip year-to-date provides a decent buying opportunity; JNJ is actually a pretty good bargain as a result of recent underperformance, with a forward P/E of less than 16.
Johnson & Johnson is a bedrock stock and leading dividend aristocrat that all investors should consider for their long-term portfolio.
Dividend Aristocrats: Old Republic International (ORI)
Dividend Yield: 4.6%
Dividends Since: 1942
Consecutive Dividend Increases: 34
You might not have heard of Old Republic International Corporation (ORI), given that it’s just a mid-cap insurance company. But ORI stock has a dividend track record that’s worth paying attention to, including a current yield that’s about twice that of the 10-year Treasury note and a seven-decade history of payouts.
ORI fell on some hard times a few years back, posting full-year losses in both 2011 and 2012. But the company has restructured and stabilized nicely. That’s just in time for what could be a much more favorable environment for insurance stocks, too, given that interest rates look to move higher in the next year or so under tighter Federal Reserve policies.
You see, insurance companies take the premiums paid by customers and invest that money in short-term instruments as they wait for claims to come in. If you have good actuaries writing good policies and the prospect of a nice investment return on premiums, it’s a big win-win — something billionaire Warren Buffett long ago learned with Berkshire Hathaway (BRK.A, BRK.B), and one of the reasons that financials and insurance companies are some of his favorite go-to investments.
If short-term interest rates are anemic, so are the returns on the “float” of these premiums. But the prospect of higher rates ahead could mean better margins for companies like ORI.
This coupled with a great track record of dividends makes Old Republic worth a look.
Dividend Aristocrats: Sonoco Products (SON)
Dividend Yield: 3.3%
Dividends Since: 1925
Consecutive Dividend Increases: 33
Sonoco Products (SON) is one of the world’s largest producers of packaging products and services, with over 330 locations across 34 countries. Its products include everything from glass bottles to cardboard boxes to plastic shells — and just about anything else you can think of, too.
Sonoco is admittedly never going to be a high-growth company, since it’s reliant on demand for its clients’ products as much (if not more) than demand of its own services. SON is also highly cyclical, because a consumer downturn naturally means less product demand and thus less packaging demand across the board.
But there’s something to be said for being one of the largest packaging providers, and running a business that includes various consumer products and grocery store staples that will see strong baseline demand, even in rough times. This reliability has given Sonoco a strong foundation and reliable revenue to support its dividend.
Admittedly, Sonoco missed forecasts in its recent earnings report and took a hit as a result. But shares are actually pretty cheap right now on the pullback, trading at a forward P/E just north of 14 and a price/sales of just 0.9 currently.
If you’re a long-term investor, it may be worth jumping into this packaging stock on the dip.
Dividend Aristocrats: Consolidated Edison (ED)
Dividend Yield: 4.2%
Dividends Since: 1885
Consecutive Dividend Increases: 41
We started with a utility stock, and we’ll end with another via Consolidated Edison (ED).
Sure, utilities like ConEd are not the sexiest stocks out there, since geographic limitations and high regulatory barriers make it quite difficult for the company to grow. However, those same factors create a wide moat that means low risk and a high degree of certainty.
How much certainty? Enough to provide for more than a century of dividends at ED, dating back to 1885!
The 4.3% yield is as attractive as the history, too, and the current payout is just under two-thirds of projected fiscal 2015 earnings.
And while some sleepy stocks have been bid up to dangerous valuations, ConEd still boasts a very reasonable forward price-to-earnings ratio of about 15, well under the 17.9 average for the S&P 500.
A focus on serving the metropolitan New York area also means a steady stream of customers. As millennials continue to flee rural areas and even the suburbs in search of opportunities in urban centers, ConEd doesn’t have to worry about where its future customers will come from.
If you’re looking for stability and yield, utility stocks have a lot to offer … and ConEd is one of the best of the bunch.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. Write him at email@example.com or follow him on Twitter via @JeffReevesIP. As of this writing, he did not hold a position in any of the aforementioned securities.