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Income Investing: The Most Elite of the Dividend Elite -- Barron's

12 May 2018 10:00 am
By Lawrence C. Strauss 

Despite their slightly snooty name, the Dividend Aristocrats didn't earn their distinction through inheritance, connections, or birthright.

The 53 names in this Standard & Poor's index got in strictly by merit. Each hails from the S&P 500, and each has had consecutive annual dividend increases for at least 25 years. Some, including Coca-Cola (ticker: KO) and 3M (MMM), have raised dividends every year back to the 1960s.

Barron's selected the 12 aristocrats with the highest yields as of the market's close on May 4. Each of these companies has a dividend yield of at least 3.3%, well above the S&P 500's 2% average.

That's a nice combination -- attractive dividends with a record of steady increases. It's a list that income-hunting investors would do well to ponder. But there is one large catch: A high yield often means that a stock has been beaten down, and that's very much the case for the Dividend Aristocrats. The $3.4 billion ProShares S&P 500 Dividend Aristocrats exchange-traded fund (NOBL) has returned 9.63% over the past year, trailing the S&P 500 by about four percentage points.

The performance is even worse for our elite 12. Nine of them had negative total returns over the past year, and a tenth, utility Consolidated Edison (ED), barely eked out a positive return. That leaves two stocks -- Target (TGT) and Chevron (CVX) -- that have performed well. Target has a one-year return of nearly 27%, Chevron, 21.4%. Both stocks were yielding 3.5%.

In other words, anyone buying these stocks will want to assess whether further declines are in the offing. That is clearly a risk. The good news is that there's at least the potential for handsome rebounds, because these companies are generally solid competitors with proven records. As ProShares points out, "Companies that consistently grow their dividends tend to be high-quality companies with the potential to withstand market turmoil, and they can still deliver strong risk-adjusted returns over time."

In short, there could be some attractive value plays in the group. The dozen highest-yielding aristocrats cut across a variety of industries. Four are consumer-staples firms, including Coca-Cola and PepsiCo (PEP). There's a retailer, Target, and one utility, Consolidated Edison, and two integrated energy giants, Exxon Mobil (XOM) and Chevron. There's also one telecom, AT&T (T), one health-care name, drug distributor Cardinal Health (CAH), and a real estate investment trust, Federal Realty Investment Trust (FRT).

Sectors missing from the mix include technology and financials. Keep in mind that many of today's tech leaders weren't even around 25 years ago, let alone paying dividends. And many financial firms had to slash or eliminate their disbursements during the Great Recession, precluding them from the ranks of dividend aristocrats. Ditto for materials companies, many of which were hit hard during that period.

Sporting the highest yield on our list is AT&T, at 6.2%. The stock has lost 13.2% over the past year. One big overhang is that the telecom is battling the Department of Justice over antitrust concerns in its attempt to buy Time Warner (TWX) for $85 billion.

The stock is now pretty cheap, trading at about 9.3 times the $3.41 a share that analysts expect it to earn this year, compared with an average of 13.3 times over the past five years, according to FactSet. AT&T has raised its dividend for 33 consecutive years, most recently by a penny, or 2% on a quarterly basis, to 50 cents a share. If it prevails in the case and lifts subscriber growth, the stock could get going again.

The next-highest yielder is Exxon Mobil at 4%. Barron's wrote about the company in its cover story last week, arguing that it was undervalued and well positioned to supply oil and gas over the long term as demand grows. The energy firm has increased its payout annually by 6.3% for 35 straight years, the latest bump announced just in April.

Its quarterly disbursement was hiked by a little more than 6%, to 82 cents a share from 77. In recent years, amid plummeting commodity prices, the company has declared smaller increases to save capital.

Two large U.S.-based consumer companies -- Procter & Gamble (PG) and Kimberly-Clark (KMB) -- were both yielding 3.8% recently. But neither stock has performed well. Procter & Gamble has a one-year return of minus 14.3%, and Kimberly- Clark's is at minus 17.1%.

A fiercely competitive global environment has made top-line growth tougher for both companies. But these firms, which generate a lot of cash, have continued to hike their dividends -- Kimberly-Clark for 45 straight years, and P&G for 55.

Yet there have been a few bright spots for both companies. P&G has notched improved growth in segments such as fabric care, including detergents, and beauty. Kimberly-Clark, which sells diapers and tissues, saw first-quarter organic sales rise by 2%, ahead of the Street's estimate.

In fact, many consumer stocks boast attractive yields as they have come under pressure. They include Coke and Pepsi, which yield 3.5% and 3.3%, respectively.

For many of these stocks, especially ones that have lagged behind, investors are getting paid to wait, and a sweetener is a long track record of annual dividend increases. --

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(END) Dow Jones Newswires

May 12, 2018 06:00 ET (10:00 GMT)

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