How to Find the Best Stocks in the Dividend Aristocrats Fund
We’re seeing the death of dividends with even companies that have paid out decades of yields cutting their cash payout.
In this video, I’ll show you how to find the dividend stocks you can count on to produce that cash flow. Then I’ll reveal the very best five in the dividend aristocrats you can buy and hold forever.
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Why I LOVE Dividend Stocks
Nation, you know we love dividend stocks here on the channel. Not only do companies that pay dividends just tend to outperform the rest of the market, these stocks are truly the best investments for that cash security and financial freedom you need.
Stock prices are a roller coaster of stress. The market crashed 35% this year only surge back 30% and all within a two-month period.
In times like this, it helps to focus on those dividend stocks, watch those checks come in to take that stress out of the market.
2020 Dividend Cuts Coming!
But you can’t just blindly invest in dividend stocks either. More than 135 companies have already cut their dividends this year. Analysts expect companies in the S&P 500 index will cut their dividends by an average of 32% this year, more than the 29% dividend cut we saw during the 2008 recession.
What I want to do in this video is show you a group of dividend stocks with a history of commitment to cash return, a group of stocks that have not only paid dividends but increased their payout for 25 consecutive years.
I’ll explain why these dividend investments beat the market and how to find the best of the best you can count on to never cut. Finally, I’ll reveal the five best stocks in the dividend aristocrats you can buy and hold forever.
What are Dividend Aristocrats?
The dividend aristocrats is a name given to stocks in the S&P 500 index that not only pay a dividend but that have increased their payouts for at least 25 consecutive years. And I like to use the ProShares S&P Aristocrats ETF, ticker NOBL, here as an example because it invests directly in these stocks.
The fund adjusts each year adding any new stocks that make the list and dropping those that couldn’t make the cut. It’s got some great companies here like Clorox, Walmart and Kimberly-Clark. The group pays a 2.4% dividend yield which is 20% higher than the broader market average and is surprisingly well diversified across sectors. You can see in the chart, it’s a little heavily weighted in consumer staples and industrials but then has a solid mix in the other sectors of the economy.
And besides that consistent dividend payment, the group tends to be less volatile compared to the market. These are older companies with stable cash flows and solid fundamentals. Management knows it has to meet that dividend payout no matter what so that cash discipline forces them to make better decisions.
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Why Not Invest in the Aristocrats ETF?
Now the question you’re probably asking, why not just invest in the Dividend Aristocrats fund and be done with it?
And we’ve looked at the fund before on the channel. I love the ease of investing, just buying shares of the NOBL and getting all the aristocrats. The fund rebalances each year so you don’t even have to follow the group.
But anytime you’re buying a fund in a theme like this, you’re getting the weaker companies along with the best. Just because these companies have a long history of dividends doesn’t mean they can’t fall from grace.
In fact, a chart of the dividend aristocrats list of stocks from 1989 to 2020 and just how much the list has changed. More than 100 companies have been dropped from the list just in the last 30 years. General Electric dropped out in 2009, Bank of America in 2008 and even Family Dollar dropped out after 14 years in 2015.
I do like the Dividend Aristocrats fund for a small part of my portfolio, the ability to diversify across all the stocks, but I also think you should pick from the group some individual stocks to target those best companies.
So I want to walk you through how I narrowed the list of dividend aristocrats, then I’ll reveal those five best dividend stocks you can buy and know they’ll always produce that cash return.
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How to Pick Dividend Aristocrats Stocks
First I’m looking for companies with a competitive advantage in their industry and I’m measuring this really on three things. I’m looking at the operating margin, so the operating income divided by the sales, both found on the income statement of the company.
And those of you in the Bow-Tie Nation know this is my favorite measure in stocks. The operating margin is the amount of sales left over after paying for materials and all those operating costs to run the company, then divided by the sales amount for a profitability metric.
This is the single best measure for how well management is able to turn sales into profits, much better than the bottom-line earnings or net margin because that’s going to include leverage and tax effects.
I’m also going to be looking at overall sales growth. Besides that profitability, I also want to find companies that are able to grow their revenue faster than the competition.
Finally here, I’ll look at the strength in the company’s brands and how much market share it has versus competitors. In fact, a lot of this is going to be evident in that operating margin and the sales growth numbers. A company with a strong brand that customers love will be able to charge a higher price, which means a higher operating margin and profitability. It will also be able to increase those sales at a faster pace and take more of the market from its peers.
Next here, and I think this is one of the most important but also overlooked factors for investing in those buy-and-hold forever stocks. I want to look for companies in industries that will be around forever and look for those universal trends that are driving the economy.
The problem is that while these might be great companies now, their industry is under attack and won’t be the same in ten- or twenty-years. A good example is the oil producers like Exxon and Chevron, both great stocks and I actually own both, but these aren’t the companies you can stick in your portfolio and not look at them for 30 years. These might be good rebound plays for the next decade but not part of my forever portfolio.
You’ve got some other companies in the retail space like Target and Ross Stores that have been able to hold on to their Aristocrats status but I’m not sure for how long.
Best Dividend Aristocrats Stocks to Buy
So the five stocks I’m highlighting here, besides that competitive advantage and the financial strength, they’ve got that long-term survivability you can count on. I’ve also picked these five from different sectors and industries to give it that diversification and safety.
Our first pick here is a favorite among investors, AT&T, the $208 billion telecom giant paying a 7% dividend yield.
Now I but I’m starting to come around on where it’s trading now and recent moves by management. The company only has $12 billion in cash versus a mountain of $150 billion in long-term debt and I’m not a fan of the acquisition strategy over the last few years.
Management has aggressively paid down debt though, paying off $11 billion last year, and the dividend is as safe as it gets. The dividend will be about 60% of earnings this year, so higher than previous years but there’s plenty of cash flow and savings from the paused share repurchase program.
Shares are trading at a price around eight-times earnings and the stock is down 25% from its 52-week high, so maybe an opportunity there. AT&T books an operating margin of 16% which is on the high end for the industry and the company doubled its net additions for wireless customers in the first quarter versus last year.
Next on our list of best dividend aristocrats is Colgate Palmolive, ticker CL, and it’s 2.6% dividend yield.
Clorox just reported a 7.5% surge in first quarter sales and this is one definitely getting a boost from higher cleaning products purchases. I mean, the name is practically synonymous with bleach.
Clorox has a solid lineup of brands with 17% of the home products segment and controls more than 32% of the worldwide market share in toothpaste.
The company books an operating margin of 23%, also one of the strongest in its industry. Now the balance sheet with just $880 million in cash against $7.3 billion in long-term debt isn’t great but this one is actually benefiting from the pandemic so I’m not worried about financials here.
Shares of Clorox trade for 23-times earnings and the stock is still down 12% from February.
Ecolab, ticker ECL, isn’t as well known among the aristocrats but is a solid long-term investment that’s nearly doubled the market return over the last five years.
Ecolab is the global leader in cleaning and sanitation products for the hospitality, healthcare and industrial space. It’s a very fragmented market but the company controls about 10% of the $130 billion global demand which gives it pricing power and scale you don’t see in competitors.
And those size advantages show through in a 15% operating margin which is increasing on efficiency programs. Shares trade a little expensive here at 32-times earnings but this is a strong long-term dividend growth story.
Now Ecolab only pays about a 1% yield which barely qualifies it as a dividend stock but the total return on this stock is almost double the market return over the past five years and I think it can continue to outperform.
Automatic Data Processing, ticker ADP, is the largest provider of corporate payroll services in the U.S. and a global leader in the space.
Companies are increasingly looking to outsource human resources services and ADP has the scale to deliver with over 650,000 clients worldwide. In fact, ADP is nearly four-times larger than its next biggest competitor, Paychex.
Now the company is expected to take a hit on the recession this year but a lot of mid-size and small clients just don’t have the capacity to do their own payroll services so that’s going to protect ADP a little.
The company books a 22% operating margin which jumped more than 2% last year on cost-cutting and the balance sheet here is pristine. ADP has $2 billion in cash against $2 billion in long-term debt so a debt neutral financial position.
Shares trade at 24-times earnings and pay a 2.5% dividend yield.
Lowe’s Companies, ticker LOW, is the second-largest home improvement chain in North America. And while Lowe’s trails Home Depot a little in market share, I like the fundamentals here and the dividend history is excellent.
That said, I think Lowe’s is probably the riskiest of the group on a short-term basis because of those store closures. Also the company was in the middle of a major restructuring, overhauling its supply chain and technology. Now that’s going to mean better profitability in the future but it was expected to cost $1.6 billion in capital spending this year. I expect the company to scale back that spending to protect cash flow but it’s also going to push back the returns on that program another year or two.
Lowe’s has 50-plus years of dividend history though and the home improvement category is probably the single best in retail to survive that death by Amazon trend. The shares pay a 2% dividend yield and trade at 19-times earnings.
Get a FREE share of stock worth up to $9,600 when you open a Webull investing account – learn more here.
The dividend aristocrats is a great group of stocks but investing in all of them means you get the worst along with the best. Instead, use a few metrics to separate them out and pick the best dividend stocks you can buy and hold forever.
