Monday, March 2, 2020

Thirty-One Dividend Aristocrats for Further Review

We have had a turbulent week on Wall Street last week. It also sounds like the upcoming week would be turbulent as well. As a result, I decided to run my screening criteria against the list of dividend aristocrats, in order to uncover hidden gems for further research.

My screening criteria include:

1) A 25 year track record of annual dividend increases ( being a Dividend Aristocrat covers that easily)
2) A forward P/E below 20
3) A dividend payout ratio below 60%
4) Annualized dividend growth exceeding 3% over the past decade

After applying these criteria, I ended up with a list of 31 dividend aristocrats for further research. The list can be viewed below:

This list is not a recommendation to buy any securities. It is just a list of companies for further research. I apply my quantitative and qualitative measures when I review each company in detail. I review the trends in earnings, revenues, dividends, payout ratios and try to understand the general direction in the company’s financials. I also try to understand the company’s business model, and see if it has any competitive advantages. It is important to determine how sustainable the income stream would be throughout the ups and downs in the economic cycle, in order to determine dividend safety. Check my analysis of Johnson & Johnson (JNJ) for more information about the company, and the process I use to review individual companies.

For example, I like companies that grow earnings per share. Rising earnings per share provide the fuel behind future dividend increases. They are important sources of future dividend growth, and provide an added margin of safety to an already well covered dividend from a low payout ratio. In a perfect world, earnings and dividends will increase at a steady clip. In reality, the rate of growth ebbs and flows.

I also view valuation as a process where you review P/E ratios with past growth and growth estimates, while also thinking about the sustainability of the earnings stream. You may like this article on how to value dividend stocks.

As part of this exercise, I also decided to stress test my assumptions, and outline the companies that sell for more than 20 times forward earnings. While I looked for a payout ratio of 60% or lower, I required a higher annualized dividend growth rate. I focused on companies with an annualized dividend growth rate of 6% or higher.

I did this exercise, because I like to think beyond dividend screens. Some of my best ideas have come from outside screening the world of dividend aristocrats and dividend champions. The ultimate test is identifying a great company that is running along on all measures, and initiating a position at the right price.

I also view this list as a possible source of good ideas if the stock market continues going downhill. If that were to happen, a lot of great quality companies that are often overvalued would finally come down to earth. Investors would be able to scoop them up at bargain prices. Since these quality companies are seldom cheap, buying them may be a priority over buying the companies that are often on the cheap list.

Again, this list is just a starting ground for further research. I can tell you from that start that while Wal-Mart (WMT) made it on this list, I would not invest in it today, given the inability to grow earnings per share since 2013. In addition, its dividend growth has been very low since 2013. This is why it is important to look at each company in detail, in order to understand if it is a good idea today, or if its best days of growth were behind it.

Relevant Articles:

How to value dividend stocks
How to become a successful dividend investor
How to read my stock analysis reports
Screening The Dividend Champions List For Bargains

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