The Dividend
Aristocrats Index has outperformed the S&P 500 by 2.76 percentage points
a year over the last decade, according
to S&P. Simply put, the Dividend
Aristocrats Index is an excellent place to look for high quality dividend
stocks.
This is because a company must
increase its dividend payments for 25+ consecutive years to be eligible for
inclusion in the exclusive Dividend Aristocrats Index. A business must have a strong competitive
advantage to raise its dividend payments for 25+ consecutive years.
Of course, not all stocks in the Dividend
Aristocrats Index are the same. Some
have better growth prospects and higher dividend yields than others. This article takes a look at the 5 highest
yielding stocks in the exclusive Dividend Aristocrats Index.
#5 –
Cincinnati Financial (CINF)
Cincinnati Financial has a dividend yield
of 3.5%. The company has paid increasing
dividends for an amazing 55 consecutive years. Cincinnati Financial is a property and casualty insurer with an $8.6
billion market cap.
The company operates in 5 main segments:
·
Commercial Insurance
·
Personal Insurance
·
Excess & Surplus Insurance
·
Life Insurance
·
Investment operations
The insurance industry is highly
competitive. Cincinnati Financial has
taken an underwriting loss on the sum of its insurance operations each year
since 2008. The company has managed to
raise its dividend payments year after year thanks to the investment income it
earns on the insurance float the company invests.
Cincinnati Financial invests differently
than most insurers. The company invests
more of its float in blue chip stocks than most insurers. This helps the company realize higher
earnings during bull markets, and lower earnings during bear markets.
The strategy of losing money on
underwriting to make it back in investments has not worked well for Cincinnati
Financial over the last decade. The
company has seen week revenue-per-share growth of under 2% a year. Despite its high dividend yield and long
history of dividend increases, Cincinnati Financial does not have solid growth
prospects moving forward.
#4 –
Chevron (CVX)
Chevron has a 4.1% dividend yield. The company has paid increasing dividends for
27 consecutive years. Chevron has a
market cap of $197 billion, making it the 4th largest publicly traded
oil corporation in the world.
The company’s stock has fallen 16.5% over
the last 6 months due to the precipitous fall in oil prices. The decline in Chevron’s stock price gives
investors an opportunity to pick up this high quality shareholder friendly
business for cheap. Chevron is currently
trading at a price-to-earnings ratio of just 10.3. Additionally, the company has not traded for
a dividend yield over 4% since the depths of the last bear market in 2009.
Some investors worry that Chevron is at risk
of cutting its dividend due to low oil prices. The company’s dividend appears safe, however. Chevron currently has a payout ratio of just
41%. Additionally, the company has very
little debt. Chevron has over $7 per
share in cash and currently pays $4.28 per share per year in dividends. The company is expected to generate about
$4.50 in earnings per share this year by analysts. Despite low oil prices, Chevron is still expected
to generate enough cash to more than cover its dividend payments.
#3 –
Consolidated Edison (ED)
Consolidated Edison has a 4.2% dividend
yield and has increased its dividend payments for 40 consecutive years. The company provides electricity to over 3
million people in New York state, and gas to over 1 million people in New York
state.
Consolidated Edison is a utility, and has
an exceptionally low stock price standard deviation. In fact, it has the second lowest stock price
standard deviation in the Dividend Aristocrats Index, behind only Johnson
& Johnson.
As a utility, Consolidated Edison is a slow
grower. The company has actually seen
its revenue per share decline by about 1.5% a year over the last decade. This slow decline is not a good sign for
long-term investors. Earnings-per-share
and dividends-per-share have shown modest growth, but the company is relatively
stagnant. Consolidated Edison is a good
choice for income oriented investors who cannot stand stock price volatility
but require little growth.
#2 –
HCP, Inc. (HCP)
HCP currently has a 5.4% dividend yield and
has increased its dividend payments for 30 consecutive years. HCP is the third largest publicly traded
health care REIT; the company has a market cap of over $19 billion.
HCP specializes in senior housing and post
acute care facilities. The company has
grown its dividends per share at about 3.3% a year over the last decade. If HCP can continue to grow at 3.3% a year,
investors will see total returns of 8.7% a year from both growth and dividend
income.
I believe it is very likely that HCP
continues to grow by at least its historical 10 year growth rate (if not faster). Demand for the company’s senior housing
facilities will pick up as ever-greater numbers of baby boomers retire and
reach old age. This combined with longer
life expectancies will increase the need for HCP’s senior housing facilities,
which will drive the company’s growth.
#1 –
AT&T (T)
The highest yielding Dividend Aristocrat is
AT&T. AT&T currently has a 5.5%
dividend yield. The company has
increased its dividend payments for 31 consecutive years. AT&T is the 2nd largest
telecommunications company in the U.S.; AT&T has a market cap of more than
$176 billion.
AT&T has managed to grow at about 4% a
year over the last decade. The company
has transitioned from a traditional telephone company (long ago) to becoming one
of the two most dominant wireless carriers in the U.S.
AT&T may very well grow faster over the
next several years than it has over the last decade. The company is acquiring
DirecTV. The DirecTV acquisition
could spur growth for the company as DirecTV has a strong presence in Latin
America which AT&T could leverage. Additionally, AT&T stands to benefit from the trend of using ever
greater amounts of wireless data. Smart
phone data usage is quickly growing. As
data usage grows, so does the demand and necessity of AT&T’s services.
Final
Thoughts
Of the 5 highest yielding Dividend
Aristocrats, only Chevron and AT&T rank highly using The 8 Rules of Dividend Investing. Both AT&T and Chevron have low
price-to-earnings ratios, high dividend yields, and solid-if-unspectacular
growth prospects.
