Nothing helps to build one’s long-term wealth like a portfolio chock-full of quality dividend growth stocks such as dividend aristocrats.
Unfortunately the opposite is also true — nothing can hurt your returns like a company having to cut its dividend.
To assess the safety of a dividend, we scrub a company’s financial statements, looking at core metrics such as its payout ratio, financial leverage, free cash flow generation and profitability trends.
Our financial review is converted into a Dividend Safety Score, which answers the question, “Is the current dividend payment safe?”
Our Dividend Safety Scores flagged a number of major dividend cuts before they were announced, including Kinder Morgan Inc (NYSE:KMI), ConocoPhillips (NYSE:COP), Stonemor Partners L.P. (NYSE:STON) and BHP Billiton Limited (ADR) (NYSE:BHP).
Investors can review the real-time track record of our Dividend Safety Scores, analyze how they are calculated, and learn how to use them for your portfolio here.
We used our Dividend Safety Scores to identify 10 of the safest dividend payers you can own today. Each dividend stock represents a solid core holding to consider for your diversified dividend portfolio. You can learn more about how to build a strong, diversified dividend portfolio here.
Dividend Growth Stocks to Buy: Procter & Gamble (PG)
Dividend Yield: 3%
Dividend king Procter & Gamble Co (NYSE:PG) has 60 straight years of dividend growth to its name. In other words, this company has proven that no matter what the economy, interest rates or geopolitics may be doing, P&G can deliver rock-steady dividends and income growth to long-term investors.
While it is true that growth has stumbled in recent years, management’s long-term turnaround plan, which involves focusing on its 65 most profitable brands and growing into emerging markets, is well on its way to returning this blue-chip dividend growth stock to its former glory of strong payout growth.
That’s thanks to management’s laser-like focus on cost cutting. For example, over the last four years P&G has reduced annual costs by $5.2 billion, and management thinks it can increase those annual savings by another $10 billion by 2021.
That total annual expense reduction of $15.2 billion, combined with renewed R&D and advertising focus on just its most important brands, is expected to send earnings soaring over the next few years.
That’s why management plans up to $70 billion in cash returns to investors, the majority of which will be in the form of buybacks.
However, that will benefit dividend investors in the long run because the vastly reduced share count will reduce the payout ratio (currently near 65%) and allow this consumer goods defensive giant to continue growing its payout at a mid-to-high-single-digit pace in the coming decade.
With a relatively high dividend yield, P&G is a favorite stock for retired investors living off dividends.
Dividend Growth Stocks to Buy: TJX Companies (TJX)
Dividend Yield: 1.4%
TJX Companies Inc (NYSE:TJX) is one of the world’s largest off-price retailers, with 3,500 stores worldwide operating under the TJ Maxx, Marshalls, Home Goods, Sierra Trading Post, Winners, Homesense and T.K Maxx names. We hold the company in our Long-term Dividend Growth Portfolio.
The secret to TJX’s rock-solid dividend, as well as its phenomenal track record of 21.6% annualized dividend growth over the past decade, is its free cash flow payout ratio below 30%.
Of course that just means that at the end of the year, when all the company’s costs, including growth expansion spending, are totaled, the remaining cash can cover the fast-growing dividend by nearly four times.
This itself is a function of the company’s exemplary leadership, marked by Executive Chairman Carol Meyrowitz (with the company since 1987), and current CEO Ernie Herrman, who just recently took over the top job from Meyrowitz in January 2016.
Since he too has been with TJX for almost his entire career (since 1989), the transition has been seamless and investors can expect strong continuity of one of the most shareholder-friendly corporate cultures in America.
Basically, what TJX does is offer to purchase excess inventory from department stores, and other retailers, at very good terms. They then pass these savings to consumers in the form of 20% to 60% discounted goods.
The key to TJX’s success is its large size and huge cash pile (over $2 billion). Because of its geographic diversification, it has extreme flexibility in what excess products it purchases, which allows it to keep asset turnover very high.
In addition, because it’s able to pay suppliers right away, and without standard concessions such as markdown allowances or return privileges, suppliers are often willing to give it favorable terms on name-brand goods that have given the company’s stores stronger-than-average branding power and customer loyalty.
Another key competitive advantage the company has is its proprietary inventory management system, which allows it to tailor its purchases with regional and local tastes and minimizes its own need for markdowns. This allows the company both to have impressive profitability, and thus generate impressive free cash flow margins.
Most importantly, that cash is then used to fund future international expansion, as well as strong buybacks and the 20%-plus dividend growth TJX has become famous for.
With a long-term track record of very shareholder-friendly business practices and an ability to grow strongly in both good economic times as well as bad, TJX is truly a great long-term dividend growth choice and a sleep well at night, or SWAN, stock.
Dividend Growth Stocks to Buy: Stryker Corporation (SYK)
Dividend Yield: 1.4%
Stryker Corporation (NYSE:SYK) is one of the world’s three largest surgical device makers, specializing in hip and knee replacements, endoscopy systems, cardiac stents, operating room equipment, embolic coils and spinal devices.
Stryker’s long-term investment thesis comes from its wide moat in the fast-growing surgical equipment market.
As the world quickly ages, demand for knee, hip and cardiac stents, as well as the company’s Mako surgical robot, is likely to increase and provide the company with the strong cash flow it needs to continue providing investors with its historically fast-growing dividend.
In fact, over the past two decades Stryker has grown its dividend by an impressive 21.9% CAGR, making it truly one of the greatest dividend growth stocks you could have owned.
With a FCF payout ratio near 35%, and a historic free cash flow per share growth rate of 10%, Stryker should easily be able to continue supplying one of the most secure dividends in America, as well as double-digit dividend growth. That’s especially true given its strong branding power.
That comes from the fact that orthopedic surgery is very highly specialized, with each supplier’s products having their own learning curves. Surgeons generally are creatures of habit and prefer not having to train up on numerous systems, which helps to build brand loyalty and pricing power, and helps maintain strong margins over time.
Dividend Growth Stocks to Buy: Nike (NKE)
Dividend Yield: 1.3%
Nike Inc (NYSE:NKE) is one of those legendary brands that is always selling for a premium, and for good reason. Fortunately for long-term dividend investors, this dividend growth stock has sold off over 15% since March 2016 because of the market’s concerns that slowing global economic growth and strong competition from the likes of Under Armour Inc (NYSE:UA, NYSE:UAA) will mean falling market share.
However, that is likely a short-sighted concern given the company’s still-solid growth, especially in its higher margin, online direct-to-consumer business.
In addition, with the largest distribution network in the world at over 50,000 retail partners, Nike continues to be the world’s leading sports apparel and equipment maker. And with the size of its fast-growing market at $320 billion and rising, the company still has plenty of growth expansion potential left, especially in developing markets such as Greater China (most recent sales up 21%), where Nike is the market leader with $3.7 billion in 2015 sales.
And lest you think that NKE is resting on its laurels and taking its branding power for granted, the fact is that management is continually focused on innovating and refreshing its bread-and-butter apparel and shoe offerings. That includes customized options and production innovation through 3D printing and automation, all of which is designed to further cut costs, and boost gross margins to industry leading levels (near 50%).
This results in strong free cash flow, leaving Nike plenty of room to not just secure one of the market’s safest dividends, but continue to grow it at double-digit rates for as far as the eye can see.
Dividend Growth Stocks to Buy: Church & Dwight (CHD)
Dividend Yield: 1.6%
Church & Dwight Co., Inc. (NYSE:CHD) is the consumer brands giant behind such well-known household names as: Arm & Hammer, Xtra, Trojan, OxiClean, First Response, Spinbrush, Nair, L’il Critters/Vitafusion, Batiste and Orajel.
Management has made a name for itself by investing heavily into R&D and advertising behind its rock star brands. For example, Arm & Hammer, America’s leading brand of baking soda, has posted 7% CAGR sales growth since 2000.
In concert with disciplined cost cutting, as well as a disciplined acquisition strategy to expand into higher-margin items such as vitamins, condoms and oral hygiene products, Church & Dwight has been able to grow its margins substantially over the past few years.
That large and growing stream of free cash flow has allowed the company to reward shareholders with strong buybacks and 27% annualized dividend growth over the past decade.
Yet, thanks to management’s disciplined approach, the payout ratio remains incredibly low, at just 28% of trailing 12 month free cash flow. This is among the lowest in the consumer goods industry and indicates that not only is this dividend among the safest you can own today, but that dividend lovers are likely to continue to see strong 8% to 10% payout growth for many years to come.
Dividend Growth Stocks to Buy: Walgreens Boots Alliance (WBA)
Dividend Yield: 1.9%
With almost 8,200 U.S. pharmacies, the company is one of America’s largest health dispensers, processing 19% of all U.S. pharmacy prescriptions in fiscal 2016.
Walgreens has proven itself a capable and fast grower in both top- and bottom-line metrics. For example, thanks to aggressive global expansion through its 2012 acquisition of Alliance Boots, Walgreens has been able to achieve enormous cost savings when it comes to lower drug prices.
This has helped to drive annual free cash flow per share growth in excess of 30% that, although unlikely to continue at this pace, has allowed Walgreens to grow its payout at 17.6% per year over the past decade, and yet still retain a very safe payout ratio of about 24%.
And thanks to the likely closing of the $9.4 billion acquisition of Rite-Aid Corporation (NYSE:RAD), which management expects will require a meaningful divestiture of stores to meet antitrust concerns, Walgreen’s industry-leading scale is set to only grow, as its pre-divestiture store count would balloon to 12,300.
That will help not just grow revenue, but also defend the company’s impressive margins in its key prescription drug segment, and ensure continued strong dividend growth in the years to come.
In other words, Walgreens is a great way for low-risk dividend investors to take part in one of the strongest economic megatrends of the coming century, the aging of the U.S. and global population.
Dividend Growth Stocks to Buy: McCormick & Company (MKC)
Dividend Yield: 1.9%
Another dividend aristocrat, with 29 consecutive years of dividend increases behind it, McCormick & Company, Incorporated (NYSE:MKC) is the world’s leading producer of spices, herbs, extracts and seasonings, distributing its products through restaurants and grocery stores under the McCormick, Old Bay, Zatarain’s and Thai Kitchen brands.
McCormick’s secret to success is, simply put, enormous scale. The company has 20% of the world spice market, quadruple that of its next nearest competitor. The company continues to be an avid acquirer of new brands as well, such as the $114 million acquisition of Australian herb maker Botanical Food, which gives it the Gourmet Garden brand.
While that acquisition only added 1.4% in top-line sales, the key for McCormick is that it has been able to successfully incorporate new brands into its world-leading supply chain, as well as achieve significant cost savings in the manufacturing process. For example, management expects to trim another $400 million in cost savings over the next four years.
The combination of low-cost manufacturing with strong brand pricing power has allowed McCormick to lead the industry in profitability.
It has also helped the company to steadily improve its FCF margin, which is one of the most important factors for dividend growth investors. Thanks to management’s $400 million savings plan, analysts expect McCormick to generate 12% FCF margins within four years, a roughly 50% improvement over 2006 levels.
Combined with slow but steady growth in top-line revenue, that creates a steady and growing stream of free cash flow with which to secure the current dividend, and continue growing it at the company’s historic 8% to 9% annual rate.
Dividend Growth Stocks to Buy: Accenture (ACN)
Dividend Yield: 2.1%
Accenture Plc (NYSE:ACN) is one of the world’s largest providers of consulting, productivity and IT services, with 380,000 employees in 120 countries, and operates in over 40 industries. We hold the company in our Top 20 Dividend Stocks portfolio.
With close relationships with 94%, and 80% of the Fortune 100 and Fortune 500 corporations, respectively, it has a wide competitive moat in a highly fragmented industry.
The key to the firm’s success is management’s strong emphasis on strong corporate relationships. Specifically, because Accenture helps to make companies more efficient though proprietary solutions to individual needs, this creates a highly sticky (i.e. recurring) cash flow stream.
For example, 99% and 97% of its clients have been with the firm for at least five and 10 years respectively. That makes intuitive sense because once Accenture has worked with a client it knows the internal framework of the company, as well as its corporate culture, and what its specific needs are.
Through disciplined acquisitions over the past three years, Accenture has focused more on IT solutions such as cloud services and security needs, which are some of the hottest corporate services industries in the world and are likely to continue to do well for decades.
Better yet, thanks to the sticky nature of its business relationships, Accenture’s core business, which is based on trust, allows it premium pricing power, with net margins 20% higher than the industry average, and stunning 60% returns on equity (double its peers, according to Morningstar).
This superior profitability has resulted in a strong FCF margin of 12%, which management uses to reward dividend investors with some impressive payout growth; 20.8% CAGR over the past decade.
While that isn’t likely sustainable into the future, thanks to the low-FCF payout ratio near 35%, investors in Accenture enjoy not just a rock-solid dividend, but can likely look forward to dividend growth of around 10% for the foreseeable future.
Dividend Growth Stocks to Buy: W.W. Grainger (GWW)
Dividend Yield: 1.9%
W.W. Grainger Inc (NYSE:GWW) is one of those dividend aristocrats (44 years of consecutive dividend growth) that few people have heard of, unless you’ve been lucky enough to own it over the past few decades and been enriched by management’s slow-and-steady approach to growing your wealth.
Grainger is an industrial supplies maker who, despite its international footprint, still gets 78% of sales from the U.S. While that might not sound like much diversification, it actually represents substantial international growth opportunities.
The same is true even in the U.S. Despite annual sales of $10 billion, W.W. Grainger has just 6% market share in the highly fragmented industrial maintenance, repair and operating industry.
Over the past few years Grainger has done a good job keeping ahead of rivals, especially in the ecommerce space. It recently decreased its number of physical distribution locations by 35%, and is increasingly focused on selling electronically, with e-sales now 60% of revenue.
Grainger’s fast-growing online presence is so strong, in fact, that it’s currently the 15th largest ecommerce company in the U.S.
Grainger’s focus on higher-margin business opportunities allows it to maintain a highly secure payout ratio over 40%, despite a fantastic 20-year dividend track record of 12.1% annual growth.
Thanks to a wide moat made possible by its industry-leading size (it’s the largest industrial distributor in America), ongoing consolidation potential and one of the most dividend friendly corporate cultures in America, W.W. Grainger is a solid core holding — one that’s likely to continue growing dividends around 10% for years to come.
Dividend Growth Stocks to Buy: Lockheed Martin (LMT)
Dividend Yield: 2.8%
Lockheed Martin Corporation (NYSE:LMT) is the world’s largest defense contractor, with 60% of its business derived from the Department of Defense, 20% from international military sales and 20% from U.S. agencies.
In the past few years, decreases in defense spending forced the company to focus on reducing costs, and employees, and it’s now a much leaner company. With 2017 defense spending likely to increase under a Donald Trump administration, this bodes well for Lockheed’s near-term earnings outlook.
In the long-term, improved sales at Sikorsky, which Lockheed bought for $9 billion in 2015, as well as strong growth from the F-35 fighter jet program, means that this defense contractor is likely to have the wind in its growth sails for years to come.
In fact, thanks to the cost cutting of recent years Lockheed’s FCF margin has grown to an impressive 9.4%, which has allowed it to continue rewarding shareholders with 18.4% CAGR dividend growth over the past decade.
While that rate isn’t likely sustainable going forward, 10% dividend growth is achievable, and with a low FCF payout ratio near 40%, Lockheed’s current dividend remains extremely secure as well.
With a low beta of just 0.6, Lockheed remains one of the best long-term core holdings you can own in any dividend growth portfolio.
As of the time of this writing, the author was long PG, ACN and TJX.