7 Hidden Dividend Aristocrats

Ever heard of a "dividend aristocrat"?

It turns out that it's a term worth knowing -- for stocks worth a close look, if you're interested in the power of dividends.

If you haven't been interested in dividends, now is a good time to revisit them: Dividends, especially when reinvested, can generate seriously impressive returns over time. And -- here's the good part -- if you pick the right stocks, those returns tend to be quite dependable, even during periods when Mr. Market is looking a little ... tired.

Of course, picking the right stocks is key -- you want stocks that can sustain those dividends over the long haul. And if they can increase their dividend payments regularly, that's even better.

Which brings me to the dividend aristocrats.

The appeal of aristocracy
"Dividend aristocrat" might sound like a cheesy throwaway phrase made up by a Barron's headline writer or something, but it turns out to have a very specific meaning. The term was coined by Standard & Poor's to denote, as they put it: "The 50 highest dividend yielding S&P Composite 1500 constituents which have followed a managed dividends policy of consistently increasing dividends every year for at least 25 years."

So what does all that mean? The "S&P Composite 1500" is a universe of stocks that is cobbled together from three indices: The S&P 500 (the top 500 U.S. large caps), the S&P 400 Midcap (the top 400 U.S. mid caps), and the S&P 600 SmallCap (the top … yeah, I bet you can guess).

To get the dividend aristocrats -- properly speaking, the S&P High Yield Dividend Aristocrats -- S&P takes all the stocks from that universe that have increased their dividends every year for at least 25 years, and picks the 50 with the fattest dividend yields.

Established companies that pay good dividends and have a long track record of increasing them every year. Think we might find a use for those?

Meet the aristocrats
The list of stocks includes some blue-chip names that won't surprise you -- Johnson & Johnson (NYSE: JNJ  ) , Procter & Gamble (NYSE: PG  ) , and Coca-Cola (NYSE: KO  ) all make the list, as do several other megacap household names. But there are plenty of less familiar names, too, thanks to the way S&P cobbled together the universe of eligible stocks -- only a third of the stocks they look at are large-caps.

Think about that for a second: Imagine a list of stocks with fat dividend yields, a long history of increasing dividends -- and a smaller market cap, which might mean their every move isn't put under a microscope by Wall Street, which might lead to some overlooked gems.

It's certainly an intriguing idea. To explore it, I took the list of 50 stocks and pulled out some with four- or five-star CAPS ratings and market caps under $5 billion:

Stock

Market Cap

CAPS Rating
(out of 5)

Dividend Yield

American States Water

$635 million

****

3%

Cincinnati Financial (Nasdaq: CINF  )

$4.6 billion

****

5.6%

Northwest Natural Gas (NYSE: NWN  )

$1.2 billion

*****

3.6%

Piedmont Natural Gas (NYSE: PNY  )

$2.0 billion

****

4.2%

RPM International (NYSE: RPM  )

$2.7 billion

****

3.9%

WGL Holdings

$1.7 billion

****

4.4%

Source: Standard & Poor's (for the list), Motley Fool CAPS (for the data).

These aren't formal recommendations, just ideas, but I'll tell you the first thing that jumped out at me when I looked at that list: Natural gas. The natural gas market has been a rough one for awhile, and that has turned many investors away. That, in turn, might lead to some interesting opportunities -- if we look carefully.

Take a look at Northwest Natural Gas, for instance: Here's a regional gas storage and distribution company that's been in business for over 150 years. "Storage and distribution" means they own tanks and pipelines and serve retail customers -- they aren't doing exploration or drilling, but are instead buying gas wholesale and selling it retail. That in turn means that their cash flow isn't at the mercy of global price fluctuations, and that makes it likely that they can keep paying -- and hopefully increasing -- those dividends.

While a 3.6% dividend isn't outstanding -- though it's certainly decent -- that five-star rating suggests that CAPS players see some price upside here as well. If I was going to pick one stock to take a closer look at, this might be the one.

But do take a closer look at any of these before buying -- the fact that they're dividend aristocrats is a good quick vetting, but any time you're counting on a dividend long-term, it's essential to know exactly what you're buying.

If you'd like to backstop your own research and check out some other great dividend generators to buy today, help yourself to a free trial of our Motley Fool Income Investor service. You can see their best ideas for new money free for 30 days with a no-obligation trial.

Looking for more overlooked dividend opportunities? Tim Hanson points out some big names you might have missed.

Fool contributor John Rosevear has no position in the companies mentioned. Coca-Cola is a Motley Fool Inside Value selection. Johnson & Johnson, Coca-Cola, and Procter & Gamble are Motley Fool Income Investor selections. Motley Fool Options has recommended buying calls on Johnson & Johnson. The Fool owns shares of Procter & Gamble. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.


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