Anti-Elitism: Beating The Dividend Aristocrats

The 54 companies currently anointed S&P 500 Dividend Aristocrats would seem to represent the crème de la crème of dividend-paying stocks. But the high hurdle to entrance -- 25 years of annual dividend increases -- doesn’t necessarily give investors a leg up on either dividend yield or dividend growth.

If you’re looking for a competitive yield, 19 of the 54 Aristocrats currently pay less than the 1.9% dividend yield for the SPDR S&P 500 ETF (SPY).

At the bottom of the yield pile among the Aristocrats, C.R. Bard (BCR), Franklin Resources (BEN) and Sigma-Aldrich (SIAL) yield less than 1%.

Steel producer Nucor (NUE) delivers a nice 2.83% yield, but shareholders haven’t seen dividend growth keep pace with inflation; over the past year it had the weakest dividend growth rate among the Aristocrats. Fellow Aristocrats Consolidated Edison (ED), AT&T (T) and Cincinnati Financial (CINF) have also delivered dividend hikes below the abnormally low 1.7% rate of inflation over the trailing 12 months:

NUE Dividend Growth (TTM) Chart

NUE Dividend Growth (TTM) data by YCharts

While consistency has its charms, the requirement of annual dividend increases over a 25-year period has an interesting consequence: There are no technology companies in the S&P 500 Dividend Aristocrats. That’s despite the fact that the stocks within the tech sector currently account for the largest contribution to the S&P 500 dividends.

Tech stocks such as Apple (APPL), Intel (INTC), and Microsoft (MSFT) currently deliver 15.6% of S&P dividend payouts, and the tech sector’s share of total index payouts has increased 50% since 2011.

If you want dividend growth without shutting out the tech sector, the WisdomTree Large Cap Dividend Index (DLN) owns old-school Aristocrats such as AT&T, Coca-Cola (KO) and Johnson & Johnson (JNJ) as well as Apple, Microsoft and Intel.

That’s not to say the Aristocrats is bereft of interesting stocks worth unleashing your equity research tools on. Global household names Coca-Cola and McDonald’s (MCD) deliver both above average current dividend yields along with strong dividend growth.

KO Dividend Chart

KO Dividend data by YCharts

The steady reliability of both firms has meant they tend to trade at a premium multiple to the market. Now is no different, as Coca Cola’s trailing PE ratio is near 21 and McDonald’s is above 17; but those levels are actually in-line (Coke), or below (McDonald’s) their trailing 5-year valuations.

In terms of compelling valuations, energy is the place to look. Aristocrats Exxon Mobil (XOM) and Chevron (CVX) both deliver above average yields and dividend growth and are trading at below-norm valuations:

XOM PE Ratio (TTM) Chart

XOM PE Ratio (TTM) data by YCharts

Of course, those valuations are low given the global energy demand s and the fact that the big integrated oil companies are currently in the midst of some major capital expenditures that likely won’t drive cash flow growth for at least a few more years. That said, a pickup in global economic growth in 2014 should provide some demand momentum.

An Aristocrat with a potentially compelling 2014 story is Stanley Black & Decker (SWK). The equity strategists at Morgan Stanley Wealth Management recently mentioned home-improvement retailers and non-residential construction as two segments with legs given expectations for stronger economic growth. Stanley Black & Decker would likely benefit from both trends. Consumer and professional tools account for nearly half of revenue. Another quarter of revenue comes from a division that produces industrial and automotive repair tools as well as industrial fasteners -- another segment of the economy that is expected to see more activity as well.

A current yield in the vicinity of 2.5% is a decent income stream, compared to the average 2% payout for the overall S&P 500. A recent push in share buybacks pushes the stock’s shareholder yield above 8%. Moreover, Stanley Black & Decker is firmly in the payout growth camp of dividend Aristocrats:

SWK Dividend Chart

SWK Dividend data by YCharts

Shares took a big hit in mid October when management reduced its 2013 targets amid softness in its security division and general malaise in Europe. That pretty much wiped out 2013’s stock price gains overnight, but recently the stock has spiked up at about double the pace of the S&P 500, suggesting that at its current below-market PE ratio, the stock is now attractively priced as a way to ride the anticipated uptick in renovation and construction in the coming year.

Carla Fried, a senior contributing editor at, has covered investing for more than 25 years. Her work appears in The New York Times, and Money Magazine. She can be reached at Read the RIABiz profile of YCharts. You can also request a demonstration of YCharts Platinum.



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