The criteria I use have been well publicized over the past decade. They are simple, but effective tools to help me identify companies to include for my diversified dividend portfolio. Obviously, since we are looking only at the list of dividend aristocrats, we are starting out with a group of companies which are already pre-screened for quality. After all, only a company with a strong business model can afford to raise dividends like clockwork for 25 years in a row, or longer. I love companies which can afford to raise dividends like clockwork. Warren Buffett also loves companies that raise dividends like clockwork. Some of Berkshire’s largest positions such as Coca-Cola, American Express, Geico, IBM, Wells Fargo are examples of high quality dividend growth stars which have compounded nicely for decades.
The first criteria is to focus on companies whose P/E ratio is below 20. I focus on this rule, in order to avoid overpaying for companies. As we all know, earnings per share can be lumpy in the near term, and distorted by one-time events. While they are not perfect, I use forward earnings as a shortcut to quickly estimate earnings power without doing too much digging in the initial stage.
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The second criteria is to avoid companies which have a dividend payout ratio above 60%. I want to focus on companies that can easily cover their dividend. I take the concept of margin of safety very seriously.
The third criteria I look at is growth in dividends per share. In retirement, we are looking for an income stream that will at least maintain its purchasing power from the destructive forces of inflation. In this case, I focused my attention on companies where annual dividend payments grew faster than 3%/year over the past decade.
Last, but not least, I also evaluate the trends in revenues and earnings per share over the past decade. As we are all well aware, without growth in earnings per share, future dividend growth will be hard to come by.
After accounting for all those factors, I came up with the following list of dividend aristocrats for further research.
|COMPANY||TICKER||SECTOR||Years of Annual Dividend Increases||Forward P/E||Dividend Yield||Dividend Payout Ratio||10 Year Dividend Growth|
|Abbott Laboratories||ABT||Health Care||44||17.8||2.43%||43.29%||13.24%|
|AbbVie Inc.||ABBV||Health Care||44||11.8||3.90%||46.02%||10.25%|
|Becton Dickinson & Co||BDX||Health Care||45||19.5||1.59%||30.94%||12.16%|
|Cardinal Health Inc||CAH||Health Care||29||15.2||2.20%||33.44%||22.70%|
|Genuine Parts Co||GPC||Consumer Discretionary||61||18.9||3.01%||56.83%||6.92%|
|Grainger W.W. Inc||GWW||Industrials||45||19.3||2.13%||41.06%||15.84%|
|Johnson & Johnson||JNJ||Health Care||54||17.7||2.57%||45.55%||8.03%|
|Leggett & Platt||LEG||Consumer Discretionary||45||19.4||2.66%||51.65%||6.86%|
|Lowe's Cos Inc||LOW||Consumer Discretionary||54||17.8||1.70%||30.24%||22.92%|
|Medtronic plc||MDT||Health Care||39||17.5||2.14%||37.48%||14.66%|
|PPG Industries Inc||PPG||Materials||45||17||1.51%||25.71%||5.03%|
|Stanley Black & Decker||SWK||Industrials||49||18.7||1.75%||32.74%||6.71%|
|T Rowe Price Group Inc||TROW||Financials||31||14.4||3.25%||46.73%||14.45%|
|VF Corp||VFC||Consumer Discretionary||44||17.9||3.07%||54.98%||12.17%|
|Walgreens Boots Alliance Inc||WBA||Consumer Staples||41||16.6||1.82%||30.18%||17.83%|
This list is not an automatic buy recommendation for you to act upon however. You need to analyze each business, and determine for yourself if it is a good fit for your portfolio. Building a dividend portfolio takes time and patience. First of all, we are assuming that the investor regularly saves money to invest for their future. In addition, the number and variety of quality companies available for sale varies from month to month. Furthermore, some of the companies may not be good additions for a portfolio which is overweight in them.
As a future retiree, I am looking for dependable dividend income which can grow above the rate of inflation. I plan on living off dividends in retirement. I am fine if I underperform all benchmarks out there, as long as my organic dividend income grows above the rate of inflation over time.
If an investor had decided to purchase more than one dividend stock at once, they could potentially use a low-cost broker like Motif Investing. Motif Investing would allow an investor to purchase up to 30 individual securities for a low price of $9.95/trade. This keeps costs low for anyone who invests $1,000 - $2,000 per transaction.
Full Disclosure: I have a position in ABT, ABBV, AFL, BDX, GD, GPC, GWW, JNJ, LOW, MDT, TROW, VFC, WBA, IBM, KO, WFC, BRK/B