The dividend aristocrats list shows companies in the S&P 500 index that have managed to increase dividends for at least 25 consecutive years in a row. This is an exclusive list, because not every company gets to meet the quality criteria to be included in the S&P 500 index in the first place. It’s also an exclusive list because only a certain type of companies that manage to grow earnings and dividends over long periods of time, spanning several recession and recovery periods, can afford to build a track record of 25 annual dividend increases.
A long streak of consecutive annual dividend increases is an indication of a quality company that has a certain type of moat around its business. Those are companies whose business models are worthy of detailed study. I view membership in the dividend aristocrats list as an indication of quality.
However, my research does not stop there. Identifying a company as a quality one is just step one in my screening process.
I have shared my screening process with you for over a decade.
The screening process usually started out as following:
1) At least a ten year streak of annual dividend increases
2) P/E ratio below 20
3) Dividend Payout Ratio below 60%
4) Earnings and Dividend growth exceeding inflation
While others have been using my screening process without attribution, I have found that they are always missing one or two of the most crucial steps in it.
Market conditions change over time, hence you need to adjust the screening criteria. This means that as interest rates and P/E ratios change over time, you need to adjust for it. While a P/E of 20 may have worked well a few years ago, it needs to be adjusted. Plus, the P/E should be taken into account along with the earnings and dividend growth rate. In other words, if two companies have a P/E of 20, the better one may be the one with a higher earnings growth.
Furthermore, you need to always dig further into each specific situation, in order to understand the data better. Not all companies are alike, which is why you need to dig into each individual company, in order to understand the nuance and do the best decision when you try to choose between companies.
Some companies are less cyclical than others. This is why a company with an earnings stream that is more defensive through the ups and downs of the economy may sell at a higher P/E, but be cheaper than a cyclical company. That's because in a recession, the cyclical company's earnings could decline quickly, and it would have turned out that the P/E was much higher than it should have been. On the other hand, the company with defensive earnings may actually grow the bottom line even during a recession. This resilience may often appear expensive, but in reality the high P/E is obfuscating the relative bargain from a long-term perspective.
In addition, you need to understand industry dynamics, which may cause you to exclude certain companies with defensive earnings streams. For example, utilities typically have high payout ratios, so you need to adjust for it. Companies in the tobacco industry also have high payouts. Last but not least, using earnings per share and dividend payout ratio on REITs misses the fact that a better metric is FFO/share and FFO Payout/share. There is a lot of nuance that is lost when you stick to mere blind quantitative evaluation of a list, without understanding much.
While it is easy to quantitatively screen the list of dividend aristocrats or champions, I believe that the best nuggets will be found by reviewing each company first.
Hence, I have moved away from screening the list, but instead focus on the individual companies that I believe have strong business models that I want to hold.
To get to this step, I reviewed the trends in earnings per share for each dividend aristocrat. I focused on the companies that have managed to grow earnings per share or FFO/share over the past decade. Rising earnings per share provide the foundation behind future dividend increases and capital appreciation.
I came up with the following list of companies for further research:
Symbol | Name | Number of Annual Dividend Increases | Ten Year Annualized Dividend Growth | Stock Price | Annual Ddividend | Dividend Yield | Forward P/E |
ADP | Automatic Data Proc. | 45 | 11.85% | 192.69 | 3.72 | 1.93% | 32.49 |
AFL | AFLAC Inc. | 39 | 6.99% | 51.56 | 1.32 | 2.56% | 10.51 |
APD | Air Products & Chem. | 39 | 10.43% | 287.22 | 6 | 2.09% | 31.67 |
ATO | Atmos Energy | 37 | 5.74% | 97.24 | 2.5 | 2.57% | 19.26 |
BF-B | Brown-Forman Class B | 37 | 8.10% | 69.38 | 0.72 | 1.04% | 40.56 |
CINF | Cincinnati Financial | 61 | 4.06% | 105.79 | 2.52 | 2.38% | 25.95 |
CLX | Clorox Company | 43 | 7.53% | 190.25 | 4.44 | 2.33% | 22.81 |
CTAS | Cintas Corp. | 39 | 19.33% | 346.61 | 3 | 0.87% | 34.54 |
ECL | Ecolab Inc. | 29 | 11.73% | 213.33 | 1.92 | 0.90% | 41.19 |
ESS | Essex Property Trust | 27 | 7.08% | 284.33 | 8.36 | 2.94% | 23.18 |
EXPD | Expeditors International | 26 | 10.03% | 107.8 | 1.04 | 0.96% | 25.49 |
GD | General Dynamics | 29 | 10.17% | 181.54 | 4.76 | 2.62% | 16.39 |
HRL | Hormel Foods Corp. | 54 | 16.04% | 47.91 | 0.98 | 2.05% | 27.57 |
JNJ | Johnson & Johnson | 58 | 6.55% | 164.93 | 4.04 | 2.45% | 17.33 |
KMB | Kimberly-Clark Corp. | 49 | 5.54% | 137.13 | 4.56 | 3.33% | 17.57 |
LEG | Leggett & Platt Inc. | 49 | 4.30% | 46.5 | 1.6 | 3.44% | 18.84 |
LOW | Lowe's Companies | 58 | 18.85% | 191.61 | 2.4 | 1.25% | 19.79 |
MKC | McCormick & Co. | 34 | 9.08% | 90.21 | 1.36 | 1.51% | 30.59 |
MMM | 3M Company | 63 | 10.84% | 194.88 | 5.92 | 3.04% | 20.29 |
NUE | Nucor Corp. | 48 | 1.12% | 79.3 | 1.62 | 2.04% | 8.79 |
O | Realty Income Corp. | 28 | 4.93% | 64.22 | 2.82 | 4.39% | 18.99 |
PBCT | People's United Financial | 28 | 1.51% | 18.03 | 0.72 | 3.99% | 14.07 |
ROP | Roper Technologies Inc. | 28 | 18.36% | 410.36 | 2.25 | 0.55% | 27.98 |
SHW | Sherwin-Williams Co. | 43 | 14.05% | 759.02 | 6.6 | 0.87% | 28.04 |
SPGI | S&P Global Inc. | 48 | 11.05% | 359.55 | 3.08 | 0.86% | 29.07 |
SWK | Stanley Black & Decker | 53 | 7.57% | 202.07 | 2.8 | 1.39% | 19.87 |
TGT | Target Corp. | 53 | 12.30% | 200.95 | 2.72 | 1.35% | 23.12 |
TROW | T. Rowe Price Group | 35 | 12.79% | 178.13 | 4.32 | 2.43% | 14.9 |
