It is a pretty incredible thing if a public company can be so successful that it not only generates enough cash flow to return it to shareholders as a dividend, but does so every year for 25 years or more. If those same dividend stocks can actually hike that payout every year, that’s even more impressive.
Such is the fine situation of a limited number of companies known as “dividend aristocrats.”
Dividend aristocrats are often the cornerstones of the conservative, income or retired investor. These companies are able to consistently improve their payouts over time because of airtight financials, which usually speak to a wonderfully stable business.
Although the possibility for capital loss is always there, these stocks are more than likely to recover faster than their peers, and over a long enough period of time, they will likely outperform them as well.
I’ve tried to pick six dividend aristocrats that aren’t just great stocks or that have the highest dividends, but that form a quasi-fund of dividend aristocrats, designed to also provide diversification.
Dividend Aristocrats: Old Republic International Corporation (ORI)
ORI Dividend Yield: 3.9%
Dividends Paid Since: 1941
Consecutive Years of Increases: 34
We can’t even begin a conversation about dividend aristocrats unless we have an insurance stock, so I chose Old Republic International (ORI).
I like ORI stock because it offers a massively diverse set of products, across virtually every aspect of insurance. This includes high-margin stuff like automobile extended warranty, home warranty, inland marine, travel accident and workers’ comp. It has a presence in the specialty arena — things like E&O insurance; insurance for directors and officers, fidelity, guaranteed asset protection and surety.
Old Republic reaches into every possible segment of business: transportation, commercial construction, healthcare, education, retail and wholesale, forest products, energy, general manufacturing, financial services and real estate.
And ORI is in great financial shape, slipping from losses in 2012 and 2011 to substantial profits during the past two years.
Dividend Aristocrats: Chevron Corporation (CVX)
CVX Dividend Yield: 4.8%
Dividends Paid Since: 1912
Consecutive Years of Increases: 28
You absolutely must have energy in your dividend aristocrats portfolio. In fact, you must have energy in any long-term diversified portfolio.
There are tons of companies to choose from, but you want to stay with the legacy explorer/producer stocks, regardless of where oil prices are.
To that end, I would suggest going with Chevron (CVX).
CVX has been investing in all kinds of infrastructure, and it remains a powerhouse global brand. But more to the point, it has about $42 billion in cash and investments, and that is not even wiped out by debt, which only amounts to $36 billion.
Chevron’s profit margin isn’t quite as high as some of its peers, but it is right in the ballpark and is also fairly valued in comparison.
It is worth pointing out that Chevron is struggling amid low oil prices. The company didn’t increase its quarterly payout this year, though its total annual payout will be greater than 2014’s, keeping it qualified as an aristocrat.
But low oil is a temporary condition. Don’t shun Chevron for much longer.
Dividend Aristocrats: Consolidated Edison, Inc. (ED)
ED Dividend Yield: 4.2%
Dividends Paid Since: 1885
Consecutive Years of Increases: 41
You have to have a utility mixed in with these other beasts when it comes to dividend aristocrats, and again, you have many choices. I’m going with the one I grew up with, Consolidated Edison (ED), and its four-decade-plus history of raising dividends.
Why are utilities so important for dividends? The reason that utilities like Edison do so well over the years is because utility rates are regulated. Thanks to ever-more-accurate data analytics, utilities can pretty much peg how much energy is going to be used in any given period. Thus, they can peg how much revenue to expect, and assign the proper amount of cash toward capex and expenses.
What’s left over is enough to pay dividends, and do so for a very long time, if they are managed correctly. Case in point: Consolidated Edison, which has paid out dividends for more than a century.
Dividend Aristocrats: Archer Daniels Midland Company (ADM)
ADM Dividend Yield: 3.1%
Dividends Paid Since: 1927
Consecutive Years of Increases: 40
I like to have a consumer goods company in the dividend aristocrats portfolio, but not one that relies on retail. I want something that involves infrastructure — the companies that move and store stuff that companies and people need.
Enter Archer Daniels Midland (ADM). This 117-year-old legend processes, transports, stores and merchandises agricultural commodities and products. This is stuff like ingredients for food, feed and energy. It’s salad dressings and all kinds of consumable oils. It handles sugar refining, and processes grains and fats, along with nuts and starches and alcohols.
Basically, if you look at the stuff on the side of the food you eat, you’ll see lots of ingredients. They have names you know — like corn, wheat, rice and barley – and names you recognize but have no idea what they do — like xanthan gum, sorbitol, and lactates. Colors. Sweeteners.
That’s a very profitable business — one that has churned out significant increases in profits over the past couple years, including a 68% bump last year.
Dividend Aristocrats: T. Rowe Price Group Inc (TROW)
TROW Dividend Yield: 2.7%
Dividends Paid Since: 1986
Consecutive Years of Increases: 29
May I have a financial services company, please? I will take T. Rowe Price (TROW), thank you. With its 29-year history of raising dividends, and a familiar brand name that is synonymous with great mutual funds, it’s hard to do better than TROW stock.
Underlying this success is great fund management. According to Morningstar, the average TROW stock fund has beaten 81% of its peers over the past decade. Strong performance means investors stay with the funds. If investors stay with the funds, then T. Rowe Price earns management fees from them.
TROW might not yield much at 2.7%, but invest in both it and a few of its funds, and you’ll do well.
Dividend Aristocrats: Air Products & Chemicals, Inc. (APD)
ED Dividend Yield: 2.35%
Dividends Paid Since: 1954
Consecutive Years of Increases: 33
I love massive companies nobody has heard of. Air Products & Chemicals (APD) is a $29 billion company that pays a 2.35% dividend and is one of several dividend aristocrats raising dividends for 32 years running.
Basically, APD stock is what you turn to when you have gas. I mean, when you need gas. Any kind of gas — you name it and APD will process and deliver it. Unless you’re paying attention, you’ll miss just how much gas is needed all over the world for kinds of manufacturing — from food processing and metallurgical work to medical and electronics.
It also processes the waste from gaseous reactions and provides chemical solutions for all kinds of civil engineering purposes.
It’s unsexy, but it’s sweet. APD is continuing to write new records in earnings and margins.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance. As of this writing, he did not hold a position in any of the aforementioned securities. He has 20 years’ experience in the stock market, and has written more than 1,200 articles on investing. He also is the Manager of the forthcoming Liberty Portfolio. Lawrence Meyers can be reached at [email protected].