Our Top 3 Dividend Aristocrats Right Now

Investors looking for dividend longevity and safety could begin their search with the Dividend Aristocrats. This is a select group of just 65 stocks that are components of the S&P 500, and have increased their dividends for at least 25 consecutive years.

The Dividend Aristocrats have proven their ability to reward shareholders with excess cash through good times and lean times, but not all are created equal.

In this article, we’ll examine our three favorite Dividend Aristocrats right now, based on their strong business models, growth catalysts, and high expected returns.

Our first Dividend Aristocrat is Leggett & Platt, a manufacturer of engineered components worldwide. The company specializes in products such as bedding, furniture, flooring, and textiles. It was founded in 1883, generates about $5 billion in annual revenue, trades with a $5.6 billion market capitalization, and recently joined the list of Dividend Kings.

Leggett’s competitive advantage is one of scale, mostly, given it operates in a somewhat commoditized business. Leggett has been able to grow its product portfolio into a deep and wide assortment of niche components that have little competition, and it has acquired its way to even more scale over the years.

The company grew its earnings-per-share by a very robust 14% annually from 2009 to 2019, but that was on a very low base coming out of the Great Recession. We see the long-run growth rate at 5% annually, which we believe it can achieve through a combination of organic sales gains, acquisitions, and share repurchases.

We note that Leggett’s earnings are cyclical and can suffer during recessions, so an economic downturn would likely derail that growth story, at least temporarily. That said, the company has managed to increase its dividend for 50 consecutive years, even during recessions, which indicates its high dividend safety.

Leggett’s total expected returns come in at 9.3%, which is comprised of 5% estimated earnings growth, the current 4% dividend yield, and a small change from the valuation. The stock trades at 15.3 times earnings, which is just below our estimate of fair value at 16 times earnings. The stock has pulled back in recent weeks, which has improved the value proposition for buyers today.

Archer-Daniels-Midland Company (ADM)

Our next Dividend Aristocrat is Archer-Daniels-Midland, a company that procures, transports, stores, processes, and sells agricultural commodities globally. The company sells feed, oilseeds, grains, food ingredients, oils, and much more. Archer-Daniels-Midland was founded in 1902, generates about $82 billion in annual revenue, and trades with a market capitalization of $39 billion. The company’s dividend increase streak is nearly as long as Leggett & Platt’s at 46 years.

The company’s primary competitive advantage stems from its very long operating history – which has built industry-leading brand recognition and expertise – but also in scale. Archer-Daniels-Midland sells commodities, so scale is everything, and the company has it. Because it sells commodities that are generally non-discretionary in nature, its recession resistance is quite good.

We currently expect the company’s earnings to grow at 6% annually in the coming years, which would be attributable to a combination of slightly higher revenue, better profit margins, and a small measure of share repurchases. We note that Archer-Daniels-Midland has chosen acquisitions over share repurchases, and that’s certainly a possibility in the near future as well.

Total returns are expected to be 8.7% annually for the foreseeable future. We see a combination of 6% expected growth, the 2.1% dividend yield, and a small tailwind from the valuation to drive returns to shareholders.

Shares are reasonably priced today, going for 14.3 times earnings against our estimate of fair value at 15 times earnings. This, despite the fact that the stock has rallied strongly in the current environment of inflationary worries, and the stock having hit a new all-time high.

Becton, Dickinson and Company (BDX)

Our final stock is Becton, Dickinson and Company, which manufactures and sells medical supplies, medical devices, lab equipment, diagnostic products, and other related products. It sells to healthcare institutions, physician offices, researchers, laboratories, pharmaceutical companies, and consumers globally.

Becton was founded in 1897, generates just under $20 billion in annual revenue, and trades with a market capitalization of $75 billion. The company also has a 50-year streak of dividend increases.

Competitive advantages are tough to come by in the sector where Becton competes, mostly because the one-time-use products and other equipment the company sells are highly commoditized. However, the company helps differentiate itself with its more specialized diagnostic products and medical devices. Still, investors should be aware competitive advantages in this sector are more difficult to achieve.

The company has shown impressive earnings growth in the past, and we expect that to continue. We see 10% annual earnings-per-share growth accruing in the coming years, stemming from a combination of organic sales growth, acquisition-driven top line gains, and modest share repurchases. Becton is definitely more of a revenue growth story, which it produces on its own, but it has also proven willing and able to acquire its way to growth.

The company’s diagnostic business saw a sizable spike from COVID-19, but that has begun to wane. Still, we see its strong portfolio of diagnostic products as helping to drive growth in 2022 and beyond, after COVID-19 conditions have somewhat normalized.

Total projected returns are 8.5%, which we see as being driven by a combination of strong 10% earnings-per-share growth, the relatively modest 1.3% dividend yield, and a headwind from the valuation. Shares go for 21 times earnings against a fair value estimate that is below 19 times earnings, so we see the stock as having gotten ahead of earnings growth slightly.

Final Thoughts

The Dividend Aristocrats offer a terrific starting point for an income investor looking for a high-quality dividend stock. All Dividend Aristocrats have proven their ability to generate reliable cash flows and return them to shareholders in growing amounts every year, irrespective of economic conditions.

However, the three we’ve identified here – Leggett & Platt, Archer-Daniels-Midland, and Becton, Dickinson – have superior fundamentals to the rest of the group.

All three Dividend Aristocrats offer strong total annual returns, dividend increase streaks of at least 46 years, reasonable valuations, and favorable growth outlooks.