At Sure Dividend, we believe that investors looking for long-term outperformance should buy and hold shares of quality dividend growth stocks. There is no exact definition of a quality dividend growth stocks, but we recommend investors start by looking at the Dividend Aristocrats list.
The Dividend Aristocrats are an exclusive group of 65 stocks in the S&P 500 Index that have raised their dividends for at least 25 consecutive years. They are among the best dividend growth stocks to buy and hold for the long run.
Dividend Aristocrats Overview
To join the list of Dividend Aristocrats, a stock must meet a number of requirements. First, they must raise their dividends for 25+ consecutive years, but they also must be included in the S&P 500 Index. Next, Dividend Aristocrats must have a float-adjusted market cap above $3 billion, and an average daily value traded of at least $5 million for the three months prior to the rebalancing date.
It is not easy to raise dividends consistently for 25 years in a row. In such a long period of time, there are bound to be multiple recessions, and other global events that cause disruptions such as the coronavirus pandemic. Companies that have grown their dividends for 25 consecutive years tend to have strong balance sheets and shareholder-friendly management teams that are committed to paying a rising dividend each year.
For a company to continue hiking its dividend even in difficult years, it must possess a recession-resistant business model that can generate consistent profitability each year. According to S&P Dow Jones Indices, from January 31st 1990 through December 31st 2018, the Dividend Aristocrats outperformed the S&P 500 70.59% of the time in down months, and 44.10% of the time in up months.
As a result, the Dividend Aristocrats are especially appealing to more risk-averse investors who want to grow their income each year, such as retirees.
Indeed, investors can generate higher levels of income from the Dividend Aristocrats relative to the rest of the stock market, along with improved dividend safety. Consider that the average dividend yield of the S&P 500 Index is 1.3%; by contrast, the ProShares S&P 500 Dividend Aristocrats ETF (NOBL) has a 1.8% dividend yield right now.
Example Of A High-Quality Dividend Aristocrat
Johnson & Johnson (NYSE:JNJ) is an example of a high-quality Dividend Aristocrat that has generated strong returns for decades, and should continue to produce returns for many years.
Johnson & Johnson has increased its dividend for 59 consecutive years. In fact, its impressive dividend history qualifies it as a Dividend King, a group of 32 stocks that have raised their dividends for at least 50 years.
J&J is a great example of a Dividend Aristocrat to buy and hold for the long-term. The stock has a 2.6% dividend yield, which is roughly double the average yield of the S&P 500 Index. Not only does the stock provide solid income right now, it also will grow the income paid to shareholders in the future.
In the past 10 years, J&J stock generated total annualized returns of 17% per year. Therefore, the stock has appeal both to dividend growth investors, and those investors seeking high total returns.
The company has produced these returns due to its industry leadership. J&J is a healthcare giant with a diversified business model across consumer products, medical devices, and pharmaceuticals.
According to the company, J&J generated 6% operational sales growth and 8% adjusted earnings-per-share growth per year, over the past 20 years. This kind of steady growth has allowed the company to continue raising its dividend each year, even during recessions.
J&J’s consistent growth is due to the company’s tremendous competitive advantages, primarily its leading position in the healthcare industry. J&J has a diversified business model, with 28 individual platforms or products bringing in over $1 billion in annual sales. The company is also diversified geographically, with 48% of its 2020 revenue coming from international markets.
The company invests heavily in product development, which has secured its long-term growth. J&J spent over $12 billion in research and development in 2020 alone. This investment pays off, as J&J generated over $80 billion in revenue (and over $20 billion in free cash flow) in 2020.
Income investing is more challenging right now. After a prolonged bull market, stocks are trading near all-time highs, which has caused the average dividend yield of the S&P 500 Index to decline. In addition, the near-zero interest rate policy of the past decade has caused bond yields to drop. Putting it all together, income investors have to look harder for decent yields.
This is where the Dividend Aristocrats come in handy. The Dividend Aristocrats are a group of 65 quality companies that have raised their dividends each year, for at least 25 consecutive years. Many of the Dividend Aristocrats have raised their dividends for 40 or 50 years (or even longer in a few cases).
And, due to their recession-resistant business models and durable competitive advantages, high-quality Dividend Aristocrats like Johnson & Johnson should continue to raise their dividends for many years. For these reasons, we believe income investors looking for long-term investment opportunities should start with the Dividend Aristocrats.