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Dividend growth stocks have proven themselves to be one of the best means of building long-term wealth. When it comes to safe and steady dividend growth, no one does it better than dividend aristocrats, which are S&P 500 companies with at least 25 consecutive years of growing payouts.
Investors can view data and analysis on every dividend aristocrat stock here. Dividend aristocrats returned of 9.7% per year over the past decade, outperforming the market’s 6.3% annual return. That makes sense since these companies have proven they have stable, steadily growing businesses that can adapt to almost any economic or interest rate environment.
Let’s take a look at the top 10 highest yielding dividend aristocrats for income. Many of these stocks are appropriate for retired investors living off dividends:
Coca-Cola (KO): Yield 3.5% 20 Year Dividend Growth Record 9.0% CAGR
With 54 straight years of dividend growth to its name, Coca-Cola has become a true dividend growth legend. The company is one of Warren Buffett’s highest-yielding dividend stocks as well.
Of course in recent years the company has struggled more than rivals such as Pepsi to grow its revenues due to declining soda sales, especially in the US market.
However, management’s current turnaround plan seems like a solid way forward for this blue chip dividend favorite. Specifically Coke plans to sell off its 39 bottling operations by the end of 2017, turning Coke into a pure play syrup company.
This is similar to McDonald’s plans to become a pure play franchise operation, because without the capital intensive bottling operations the company’s profitability will soar.
For example, after the bottling operation sale, Coke expects to see its FCF margin increase 9% to 27%, a figure that one usually only sees with tech companies or biotechs. What’s more management thinks it can cut another $3 billion in costs by 2019, which would likely send FCF margin north of 30%.
And to restart top line sales growth the company is investing heavily into diversifying its beverage brands, especially non-carbonated juices, teas, and water. For example, the company recently purchased AdeS, a popular South American soy beverage brand from Unilever for $575 million.
Coke plans to further find fast growing, healthier brands and then insert them into its globe spanning supply chain, and put its legendary advertising prowess behind growing them, especially in emerging markets.
Over the long-term analysts expect Coke to be able to grow its top and bottom lines by 5% and 6% to 8%, respectively, courtesy of rising margins, and steady share buybacks from its supercharged FCF machine. That should translate to 5% to 7% dividend growth, which while lower than the company’s past payout growth rate, should still be good for 8.5% to 10.5% annual total returns.
And while 9.5% total returns may be on the low side of what the stocks on this list are offering, keep in mind that Coke’s low volatility (beta of 0.7), means that on a risk adjusted basis Coke’s 13.6% potential returns still make it an excellent core holding.
Johnson & Johnson (JNJ): Yield 2.7% 20 Year Dividend Growth Record 11.3% CAGR
There is no more stable or safe a pharmaceutical giant than Johnson & Johnson. In fact, the company is not just a dividend aristocrat, but with 54 years of consecutive dividend growth, JNJ achieves an even rarer status of a Dividend King.
The key to JNJ’s success and stalwart stability is its medical conglomerate business model. That’s thanks to its over-the counter consumer business, as well as its medical device segment; both of which serve to diversify its sales, earnings, and cash flow.
That steady cash flow allows the company to richly reward shareholders, both with safe, and steadily growing dividends, as well as consistent buybacks. Those in turn help to generate impressive growth for a behemoth of its size, including 8.2% EPS growth in 2016, a year in which most pharma companies struggled to growth due to the fiercely competitive nature of the patented drug market, as well as the strongest dollar in 15 years.
Better yet? Johnson & Johnson has a great track record of growing through acquisition, including the recently announced $30 billion acquisition of Pulmonary Arterial Hypertension giant Actelion. In fact, management believes that this all cash deal will result in long-term sales and earnings growth acceleration of 1% and 1.5-2%, respectively.
Which in turn means that, with a safe payout ratio of 54%, long-term shareholders can likely expect not just a bank vault safe payout, but also around 7% to 8% dividend growth going forward.
With JNJ about to announce its 55th straight annual dividend increase, that would likely mean a 3.0% forward yield. Combined with its solid dividend growth prospects Johnson & Johnson investors are likely to see 10% to 11% long-term total returns. That’s far superior to the market’s historical 9.1% CAGR and makes JNJ a true “buy and hold forever” dividend growth stock.
PepsiCo (PEP): Yield 2.8% 20 Year Dividend Growth Record 9.9% CAGR
Pepsi, with 44 years of consecutive dividend growth, is one of the safest blue chips you can buy today. While the company is best known for its Pepsi and Mountain Dew sodas, it’s done a great job of diversifying away from carbonated beverages which have seen lagging sales volumes in recent years.
That has resulted in Pepsi becoming one of the world’s largest food conglomerates, with ownership of famous non-pop brands including Gatorade, Tropicana, as well as numerous snack foods brands such as Lay’s, Doritos, and Quaker make Pepsi the world’s largest snack foods company.
However, the company isn’t resting on its laurels and is positioning itself to compete well in an era of increasing concerns over the health of what we put into our bodies.
In fact, 45% of the company’s sales (51% of which come from faster growing overseas markets) are derived from its “guilt free” products, including drinks with less than 70 calories per 12 oz serving. Meanwhile 27% of sales are from increasingly popular nutritional foods, such as grains, fruit, vegetable, protein, tea, juice, and water products.
For example, its Sabra brand of hummus, guacamole, salsa, and Greek yogurt dips alone generate $800 million in sales, and management soon expects Sabra to become a $1 billion brand. That would be the company’s 23rd brand that holds such a distinction.
Combined with ongoing cost cutting ($1 billion or more in annual cost savings every year since 2012) Pepsi is able to generate consistent earnings and free cash flow or FCF growth that should allow it to continue growing its rock solid dividend at around 8% to 9% a year.
That should be good enough for 10.8% to 11.8% total return from this extremely low risk and low volatility blue chip (beta of just 0.53).
McDonald’s (MCD): Yield 3.0% 20 Year Dividend Growth Record 17.2% CAGR
While the golden arches have struggled with falling traffic in recent years CEO Steve Easterbrook has a very solid plan to help turn McDonald’s into a more upscale, health conscious global restaurant titan.
This is composed of three parts: a better, simplified menu; “experience of tomorrow;” and moving to an almost all franchise business model.
The better menu, includes adding popular selections, such as breakfast all day, and continued rollout of its popular McPick 2 dollar menu, which has helped to return US comps to positive growth.
Meanwhile the “experience of tomorrow” which has been rolled out overseas to great success, involves more upscale stores, with tablet ordering to help improve service times, improve reliability, and generate higher customer satisfaction.
Better yet, the data that McDonald’s collects can help it to optimize its menu for local tastes, but without adding undue complexity and strain on local store owners.
Finally, the company plans to re-franchise 4,000 stores by 2018, on the way to 95% of its global 36,000 locations being operated by franchisees. The franchise business model, in which McDonald’s sells its food to stores and takes a cut of the revenue, is far more profitable due to lower operating costs.
That should help boost long-term sales growth to the mid-single digits in a few years, when the re-franchising efforts are complete. Combined with expanded margins, and steady buybacks McDonald’s should be able to generate long-term EPS growth of about 9%, translating to 7% to 8% dividend growth, and 10% to 11% annual total returns.
Procter & Gamble (PG): 3.0% Yield 20 Year Dividend Growth Record 9.6% CAGR
Procter & Gamble, with 60 straight years of dividend growth under its belt, is not just a Dividend King, but has the longest consecutive payout growth record on this list. More impressively, P&G has paid an uninterrupted dividend every year since 1891, making its dividend among the most dependable of any company in the world.
More importantly, though the company has struggled with top line sales in recent years, management is making all the right moves to craft an impressive turnaround that should allow it to continue richly rewarding dividend lovers for decades.
Specifically, after learning that its top 65 brands accounted for 90% of sales and 95% of profits, the company sold off its 101 worst performing brands and re-allocated the capital to a more concentrated advertising and R&D effort. Analysts expect this to help boost the company’s organic growth (which is already happening), and achieve 4% long-term sales growth.
The second part of the turnaround is in costs, which the company has already made amazing progress in slashing since 2012. In fact, over the past five years P&G has cut annual costs by $7.2 billion, and management is confident it can cut another $10 billion in annual costs by 2021.
That should send earnings, and FCF soaring, and explains why Procter & Gamble is planning on returning an epic amount of cash to shareholders, including $22 billion in 2017 alone.
All told, P&G’s amazing turnaround efforts should translate into 7% to 10% dividend growth over the next decade, allowing for potential total returns of 10% to 13%; fantastic for such a safe and low volatility stock (beta 0.64).
T. Rowe Price (TROW): Yield 3.0% 20 Year Dividend Growth Record 16.1% CAGR
T. Rowe Price is one of the most trusted names in asset management, with over $813 billion in assets under management. 66% of that is in retirement accounts and annuities, meaning the company is better insulated than most asset managers from the increasing popularity of passive investment vehicles like index ETFs.
Better yet, the company’s retirement date funds have seen strong growth in recent years, and thanks to its 81%, 84%, 82%, and 88% of its mutual funds beating their benchmarks over the last one, three, five, and ten years, respectively, T. Rowe Price’s AUM should see solid low to mid-single digit organic growth over the coming years.
Combined with a disciplined approach to cost cutting, as well as steady buybacks, that should allow for 9% to 9.5% EPS growth, and solid free cash flow generation that should lead to 8% to 9% dividend growth over the long-term.
Combined with today’s generous, and highly secure, (45% EPS payout ratio), that should generate solid, market beating long-term total returns of 11.1% to 12.1% CAGR.
Best of all, with a historical median yield of 2.0% T. Rowe Price is one of the few dividend aristocrats that are trading at a significant discount in this overheated market.
VF Corp (VFC): Yield 3.3% 20 Year Dividend Growth Record 11.3%
VF Corp may not be a household name, but this apparel maker owns some of the best known, and most popular lifestyle brands (about 30 in total) including: The North Face, Timberland, Vans, Lee, Wrangler, and Nautica.
Due to weak sales growth over the past year, (a problem faced by most of its rivals as well), VF Corp shares have fallen 12% over the past year compared to the S&P 500’s meteoric 28% rise. However, this could create one of the best long-term dividend growth buying opportunities because VF Corp has a fantastic track record of acquiring, improving, and growing brands over time.
That’s thanks to the company’s exemplary management team, led by CEO Steve Rendle; who has over 30 years of experience in the industry, including 16 with VF Corp. The company is especially well known for its ability to utilize economies of scale to boost margins over time.
For example, since acquiring Timberland back in 2011, VF Corp has overseen the growth of that brand’s operating margins from 7.9% to 12.9%, and management thinks it can eventually raise that to 18.0%
That kind of strong margin power, courtesy of its premium brands, (The North Face Parkas often sell for $289), should allow VF Corp to generate long-term sales growth of about 7%, with EPS growth of 10%. That should allow for 8% to 9% dividend growth, as management brings the current FCF payout ratio of 50% down to its long-term target of 40%.
While that may not be as much as the company has offered in the past, it should still be enough to generate excellent 11.3% to 12.3% annual total returns in the coming years from one of the most undervalued high-quality dividend growth stocks on Wall Street.
Target (TGT): Yield 3.7% 20 Year Dividend Growth Record 14.7% CAGR
Thanks to its recent top line growth struggles Target is down 5% over the past year, making it one of the few undervalued dividend aristocrats you can buy today.
The key to Target’s long-term investment thesis is management’s turnaround plan, which involves combining a larger focus on online sales, along with its popular signature, ie store brand categories, (such as children’s fashion and wellness), with ongoing cost cutting, and growth of its REDCard loyalty program.
Management is confident that it can use this combination to reignite customer traffic growth, and comps, while cost cutting (via streamlining supply chains), and buybacks bring bottom line growth of EPS, FCF, and dividends.
In addition, Target is trying out new urban stores (CityTarget), which are smaller than its usual superstores, but could give it a new untapped market with which to grow sales. Analysts expect Target to be able to generate long-term organic growth of 3%, which should translate to 6.5% EPS growth, once margin expansion and buybacks are factored in.
However, thanks to a low FCF payout ratio of just 40%, Target should be able to grow its dividend at a 6% to 7% rate going forward. That’s good enough for 9.7% to 10.7% annual total returns, and around 16.2% on a risk adjusted basis, courtesy of the company’s low volatility (beta of 0.63).
AbbVie (ABBV): 4.2% 3 Year Dividend Growth Record 12.5% CAGR
AbbVie was spun off from fellow Dividend Aristocrat Abbott Labs (ABT), back in 2012, and represents one of the fastest growing major biotech firms in America. Its claim to fame is mega-blockbuster Humira, which is one of the world’s top selling anti-inflammatory drugs with almost $7 billion in 2016 sales.
Of course, as seen with rival Gilead Sciences (GILD), whose sales have become dominated by its Hepatitis C drug blockbusters Sovaldi, and Harvoni, too much reliance on just one or two drugs can create major problems for a company. Specifically the market is very worried that competition from biosimilars will steal market share from Humira, which represents 50% and 70% of AbbVie’s sales, and earnings, respectively.
However, management is confident that Humira sales, which were up 15.5% in 2016, can eventually become a $18 billion sales giant by 2020. That’s because AbbVie has 70 patents it thinks can stave off biosimilar competition through 2022.
That explains management’s optimistic guidance of low double digits sales growth, and 13% to 15% adjusted EPS growth in 2017. However, because of Humira’s immense success, there are currently 35 biosimilar, ie generic, rivals in development and many analysts think that management’s guidance is overly optimistic.
Thankfully the company is working hard to diversify its cash flow away from Humira courtesy of a late stage development pipeline of 12 drugs, including potential cancer drug Imbruvica, which has the potential to become a $7 billion blockbuster all on its own. In fact, Abbvie considers its top 8 late stage drug candidates to be capable of $25 billion to $30 billion in annual sales, which could result in AbbVie doubling its revenue to $50 billion by 2020.
And with a moderate FCF payout ratio of about 50% and impressive FCF margin of 28%, AbbVie’s generous yield remains both highly secure, and capable of long-term growth of around 10% to 12%.
Combined with the current 4.2% yield, AbbVie investors can probably expect around 14.2% to 16.2% total returns from one of the most undervalued names in the market today.
AT&T (T): Yield 4.8% 20 Year Dividend Growth Record 4.2% CAGR
AT&T is thought of by many as a boring, slow growing high-yield dividend blue chip, and while it does represent one of the safest high-yield stocks you can own, management has been working hard to fire the company’s growth engines.
That includes: a $7.4 billion entrance into Mexico’s fast growing wireless market, large investments into 5G technology, including Project AirGig, which uses special wireless antennas on existing power line poles to bring wireless broadband internet to customers, and of course its major acquisitions – DirecTV and now Time Warner (TWX).
In fact, once the synergies from the Time Warner acquisition are complete, that deal has the potential to boost AT&T’s free cash flow by a staggering 55%, to $25.6 billion.
Better yet, Time Warner represents a much faster growing (sales in Time Warner’s most recent quarters grew by 11%) and higher margin business, which could allow AT&T to one day regain its former dividend growth rate of about 4% once it pays down the debt it needs to complete the deal.
That would make AT&T a very attractive long-term investment, with long-term total return potential of 8.7% to 9.7%.
While that may not sound all that great, the stock’s incredibly low volatility (beta of 0.39) makes for an appealing risk-adjusted total return.