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.
The Dividend Aristocrats List
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.
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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.
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.
Finding The Best Nuggets
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|
|APD||Air Products & Chem.||39||10.43%||287.22||6||2.09%||31.67|
|BF-B||Brown-Forman Class B||37||8.10%||69.38||0.72||1.04%||40.56|
|ESS||Essex Property Trust||27||7.08%||284.33||8.36||2.94%||23.18|
|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|
|LEG||Leggett & Platt Inc.||49||4.30%||46.5||1.6||3.44%||18.84|
|MKC||McCormick & Co.||34||9.08%||90.21||1.36||1.51%||30.59|
|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|
|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|
|TROW||T. Rowe Price Group||35||12.79%||178.13||4.32||2.43%||14.9|
Note that this data is as of March 26, 2021.
This list of course is not an automatic buy. Each company needs to be reviewed in a little more detail. Some of these companies are overvalued, and I would only be willing to buy them at a lower price. Other companies may be attractively valued today, but I may already have a full position in them.
However, this is the type of watchlist I would have, and I would then set some entry prices under which I would be willing to invest.
- Dividend Aristocrats List for 2021
- My Entry Criteria for Dividend Stocks
- Buying Quality Companies at a Reasonable Price is Very Important
- My screening criteria for dividend growth stocks
- Screening The Dividend Champions List For Bargains
Article by Dividend Growth Investor