10 Dividends to Trust

Trust. It's almost a quaint word when each day brings us more bad news about the folks running our companies. Another insider trading scandal. Another corporate expense account maxed out at a strip club. Another CEO getting paid eight figures to destroy ten figures of shareholder value.

Perhaps this is why I've noticed a renewed interest in stocks that tangibly show their trustworthiness by regularly returning cold, hard cash to shareholders.

Of course, it doesn't hurt that savings accounts and bonds just aren't paying what they used to. And that dividend payers have a long history of outperforming their non-paying brethren.

Whatever your reason for making dividend stocks a healthy part of your portfolio, I'd like to highlight 10 stocks that not only pay robust dividends now but also have a long history of consistently raising their dividends.

How I chose the 10
I chose these 10 dividend stocks from an already exclusive club of 42 stocks known as the Dividend Aristocrats. Basically, these are the 42 stocks in the S&P 500 that have raised their dividends each and every year for the last quarter century (or longer).

From this group of 42, I chose my favorite dividend stock from each of the 10 major industry groups. I do this both to highlight some individual stocks and to create an intriguing portfolio.

Here are my choices:

Company

Industry

Dividend Yield

Payout Ratio

Forward P/E

McDonald's Consumer Discretionary 3.2% 48.7% 15.1
Kimberly Clark (NYSE: KMB  ) Consumer Staples 4.3% 57.8% 13.2
ExxonMobil Energy 2.1% 27.9% 11.3
Aflac (NYSE: AFL  ) Financials 2.2% 22.8% 8.7
Abbott Labs (NYSE: ABT  ) Health care 3.9% 57.7% 10.8
3M (NYSE: MMM  ) Industrials 2.4% 36.7% 15.0
ADP Information Technology 2.8% 56.5% 20.1
Air Products & Chemicals (NYSE: APD  ) Materials 2.6% 39.0% 15.4
CenturyLink (NYSE: CTL  ) Telecommunication Services 7.1% 92.6% 13.9
Consolidated Edison (NYSE: ED  ) Utilities 4.7% 63.4% 14.4
Average   3.5% 50.3% 13.8

Source: Capital IQ, a division of Standard & Poor's.

Not surprisingly, there are some serious heavy hitters on this list. Three of the companies -- McDonald's, ExxonMobil, and ADP -- make the list of my 20 favorite companies; Kimberly Clark (Kleenex), Aflac (the insurance-selling duck), Abbott (Pedialyte), and 3M (Post-Its) all have strong brand recognition; Consolidated Edison and CenturyLink's dividends speak to those outside their service areas who would recognize their brand; and the lesser known Air Products & Chemicals holds its own with a 19.2% return on equity.

Together, this group averages a dividend yield of 3.5% -- almost twice the yield of the S&P 500 without much of a price premium (the forward P/E ratio of this group is 13.8 vs. the S&P 500's 13.7).

How to use this list
As I've written many times before in this space, there's nothing wrong with just buying the index. Regularly putting money into an S&P 500 index ETF or mutual fund is a good core position for most portfolios. You'll perform as the market performs, less fees.

To beat the market, though, we have to get more granular. We can buy into the 42 Dividend Aristocrats to make a more dividend-rich portfolio, hone it down further to my list of 10, or pick and choose individual bets from among the 10.

With each granular step, we lose some of the safety of diversification and gain the possible advantage of stock picking. Salt to taste.

Personally, I anchor my stock portfolio with broad indexes like the S&P 500 and trusted mutual funds. Then I layer in individual stock picks I've spent the time to research.

If you're interested in the stocks I've highlighted, click here to immediately access our latest analysis on my 10 stocks and get our free report: "Six Stocks To Watch From David and Tom Gardner."

Anand Chokkavelu owns shares of McDonald's and ExxonMobil. 3M is a Motley Fool Inside Value selection. AFLAC is a Motley Fool Stock Advisor pick. ADP, Kimberly Clark, and McDonald's are Motley Fool Income Investor selections. The Fool owns shares of Aflac, Abbott Laboratories, and ExxonMobil. Motley Fool Alpha LLC owns shares of Abbott Laboratories. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (38) | Recommend This Article (168)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 05, 2011, at 3:49 PM, pryan37bb wrote:

    This is one of my favorite Fool.com articles so far, although I wish you'd gone a bit more in-depth on each of the stocks. I totally agree that a part of every investor's portfolio should consist of an index fund, but I would suggest instead of S&P 500, the Russell 2000 might be a better long-term choice, for those who can withstand a bit more short-term volatility. According to research done by Jeremy Siegel, in the same book that shows dividend payers outperform non-payers in the long run, small-cap stocks greatly outperform larger-cap stocks in the long run as well. The Russell 2000 doubled from its March 2009 lows almost a year before the S&P 500 did the same.

  • Report this Comment On April 05, 2011, at 5:09 PM, mikecart1 wrote:

    Overall half those dividends stink. Where is MO? Where is PM? Where is WIN? Where is VZ? Where is T?

  • Report this Comment On April 05, 2011, at 5:21 PM, Fred4953 wrote:

    OOOhh, Nooo!

    I just picked up CTL from its Q takeover..and for sure, it's dividend won't last long..

    Look@ the payout ratio!!! and its stock has been plunging since the buyout

    Can't TRUST this one!!!

  • Report this Comment On April 05, 2011, at 5:27 PM, pastreet wrote:

    I was also surprised by the lack of mention of telecom stocks in this article. I think ATT's prospects look even better now, in light of recent developments...

    www.compoundingreturns.com

  • Report this Comment On April 05, 2011, at 6:08 PM, richinhisgrace wrote:

    Educate me. What do you do about the temptation to go with higher dividend payers such as CMO, ARCC, or AINV, or Annaly?

  • Report this Comment On April 05, 2011, at 6:16 PM, stephen706 wrote:

    2% yield is a sorry yield... I have been in WWE for years with its $1.44/share dividend that has just kept paying and paying. Yes, it is higher than makes sense. But you know what--the company still has very low debt, still draws a lot of cash, and even if it chopped its dividend by a third, it would still be close to 8% annual...

  • Report this Comment On April 05, 2011, at 6:19 PM, jm7700229 wrote:

    @richinhisgrace, those are much more volatile and lack the history of dividend growth. I have a big chunk of (otherwise idle) money in a couple high payout REITs, but those aren't investments for the long term, just taking advantage of current conditions. Chasing the high returns is a higher risk strategy that is not suited to the buy-and-hold investor.

  • Report this Comment On April 05, 2011, at 6:21 PM, utilitybug wrote:

    richinhisgrace:

    CMO's dividend fluctuates, and if (or rather when) interest rates will go up it will likely decrease.

    I believe NLY is in the same boat.

    Disclosure: owned CMO for a year or 2 and looking for a good exit point.

  • Report this Comment On April 05, 2011, at 6:25 PM, utilitybug wrote:

    mikecart1,

    I agree - instead of CTL(due to recent developments) VZ and T should be on the list.

    But that requires effort of research which frequently is lacking here.

  • Report this Comment On April 05, 2011, at 6:54 PM, iamlard wrote:

    richinhisgrace, stephen706, utilitybug,

    You all missed the point of this article. Each stock in this list is a dividend champion.

    In order to qualify as a dividend champ, the company needs to pay an increasing dividend for at least 25 consecutive years. Any decrease, and it's off the list.

    CMO, ARCC, AINV, NLY, WWE, and T aren't even dividend challengers, and VZ just barely made the dividend challenger list

  • Report this Comment On April 05, 2011, at 8:16 PM, setonhall wrote:

    I like the list compiled and well written article. The companies listed have weathered at least 25 years of market volatility while continuing to grow their dividend. I also would like to add SON as a possible dividend champion. Off the top of my head I think they have increase their dividend for at least 30 years.

  • Report this Comment On April 05, 2011, at 11:17 PM, stephensage wrote:

    Article content aside ( good stuff, BTW), it is a business faux pas to add up averages, divide by number of inputed averages, thus --- allegedly -- averaging the averages. Don't do it!! It's bad math because it results in an unweighted figure that is not a true weighted average. I see this error all the time in otherwise decent, savvy investing articles. IF I had done the same in my career at JnJ or eBay, I would have been fired thrice over. Instead, break down each average (= a ratio of total pay outs [# shares x div p. share] to costs [price p share]) into its components; add up the total payments across all stocks; separately, add up the costs across all stocks; THEN divide the two (payouts vs costs) to calculate the true weighted average.

  • Report this Comment On April 06, 2011, at 10:40 AM, BritInCA wrote:

    Please someone explain the payout ratio, or tell me where to find an explanation.

  • Report this Comment On April 06, 2011, at 11:51 AM, iamlard wrote:

    BritInCA

    Payout ratio is the dividend per share divided by earnings per share.

  • Report this Comment On April 06, 2011, at 11:54 AM, iamlard wrote:

    setonhall

    SON is a dividend champion, with 27 years or increasing dividends. They're due for an increase in the dividend in the next month if they want to remain a dividend champion, since their last dividend increase occured in May of 2010.

  • Report this Comment On April 06, 2011, at 11:54 AM, TMFBomb wrote:

    @pryan37bb,

    Stay tuned to the comments for more on some of the individual companies.

    As for which index fund or ETF to follow, I like a variety that covers market caps, industries, and geographies.

    For index ETF's, my preference is Vanguard: for instance, I own VEA (foreign large caps), VWO (emerging markets), VTI (total US stock market), VIG (dividends), VO (midcaps), VV (U.S. large caps). You could argue the VO and VV ownership is redundant with the VTI, but you get the idea.

    Of course, to avoid all those decisions, the one-stop shop for stock/bond allocation are Vanguard's target date funds.

    -Anand

  • Report this Comment On April 06, 2011, at 1:11 PM, skat5 wrote:

    My strategy has been to pick up those stocks in the aristocrats that are at year lows or even multi-year lows, and hold them for retirement divident. There are a few exceptions: I won't consider a yeild less than 2%, a payout ratio greater than 75%, or a P/E exceeding 25. The idea is that the stocks are temporarity out of favor due to short term conditions, yet the dividend is likely to be safe because they have been paying out for over 25 years. An example of this is SYY, which is down because high food prices will hurt their margin; a short term condition. MDT is another example. The best buying opportunities come when some Wall Street pontiff downgrades a stock. The sheep panic. Generally the expert is only right half the time, so I ignore them; its all froth and churn with them. Long term for them is a quarter or at most a year.

    Although my strategy is to hold for dividend, if a stock makes a large move into new highs, I sometimes sell a portion if it seems over-valued. An example of this are some of the oil stocks, driven to new highs by oil prices which may or may not persist. My selling realizines some profit well in excess of years of dividends for the shares, with the intention of buying shares in the company again when the market's excessive love wanes. One can count on the market being fickle.

  • Report this Comment On April 06, 2011, at 1:34 PM, biddy11 wrote:

    Where is MO?

  • Report this Comment On April 06, 2011, at 1:38 PM, biddy11 wrote:

    I retract my previous statement, I just skimmed through the article didn't realize till now that you pick from the Aristocrats! Oops

  • Report this Comment On April 06, 2011, at 1:41 PM, iamlard wrote:

    skat5

    I like your idea, but I prefer the dividend champions and challengers, due to the methodology used to maintain these respective lists. The aristocrats are updated once a year, while the champions/challengers/contenders are updated monthly.

    My strategy is to look for the champions and challengers with P/E ratio < 15, yields in excess of of 3%, dividend growth rate > 10%, and payout ratio < 60%.

  • Report this Comment On April 06, 2011, at 2:31 PM, TMFBomb wrote:

    @ a bunch of folks,

    Re: stocks that were excluded. My universe for this article was the 42 Dividend Aristocrats. Here's the link for them (go to the "Download Index Data" section to access the list of companies):

    http://www.standardandpoors.com/indices/sp-500-dividend-aris...

    So, while I own shares of Altria (MO) and Philip Morris (PM), I couldn't choose them for this exercise.

    @Fred4953,

    Similar to the above, I was constrained by the universe of 42 Dividend Aristocrats. Unless I missed one, I think CenturyLink was the only telecom in the running. So don't read too much into my selection. As it deals with the logistics of a major merger and the difficulties of maintaining a payout of almost all their earnings as dividends, CenturyLink ceartainly isn't a foolproof dividend play.

    -Anand

  • Report this Comment On April 06, 2011, at 2:47 PM, TMFBomb wrote:

    @richinhisgrace,

    There's nothing wrong with a higher dividend yield per se. The question is always whether that yield is sustainable. You mentioned some mortgage REITs as examples. To address that specifically, see this article that I wrote:

    http://www.fool.com/investing/dividends-income/2011/02/08/yo...

    -Anand

  • Report this Comment On April 06, 2011, at 2:58 PM, TMFBomb wrote:

    @stephensage,

    Good point.

    I did do the straight averaging on purpose because the Dividend Aristocrats is an equal-weighted index (vs. the S&P 500 which is weighted by market cap -- i.e. the larger companies have more weight in the index).

    This is fair for my main stat -- the dividend yield -- but isn't ideal for the other two (payout ratio and p/e ratio). Hoaever, because there weren't any crazy outliers (like a P/E of 900 or a payout ratio of 500%), I decided to keep the straight averages for all for simplicity.

    Make sense?

    Fool on,

    Anand

  • Report this Comment On April 06, 2011, at 3:00 PM, TMFBomb wrote:

    @skat5 and iamlard,

    Good thoughts!

    -Anand

  • Report this Comment On April 06, 2011, at 4:39 PM, TMFBomb wrote:

    All,

    I got a reader e-mail regarding the REIT Realty Income (O) and its 5% dividend yield. I haven't looked into the company very deeply. Anyone have thoughts on it?

    Thanks,

    Anand

  • Report this Comment On April 07, 2011, at 4:19 PM, Beans1 wrote:

    " As it deals with the logistics of a major merger and the difficulties of maintaining a payout of almost all their earnings as dividends, CenturyLink ceartainly isn't a foolproof dividend play."

    You make it sound like CTL is dangerous to own right now. So then why include it in an article called dividends to trust??

    The general analyst consensus seems to be 'buy' on this stock. While the merger will most certainly cause bumps in the road, I look at it as a long-term hold, and even if the dividend yield drops, it's has a good cushion to fall from.

  • Report this Comment On April 08, 2011, at 12:43 PM, GbreadMan wrote:

    At the moment, VZ might not be a great long-term dividend payer, but it's what I like to call a "large-cap dividend/growth hybrid". Their technology and dedication to infrastructure upgrades is such that it will win the long-term communications game.

    Fiber optics direct to the house is going to change the entire game; the limit of fiber-optic bandwidth has not yet been found (the limit achieved so far is 69Tb/s, literally millions of times faster than shared-bandwidth coax cable). While coax has a fiber backbone, it still relies on copper for the "last mile" of service. FIOS goes straight to the customer's demarc.

    From an infrastructure point-of-view, once Verizon is finished building its fiber optic infrastructure (and tearing out the copper scrap for a tidy offset-profit) it merely has to upgrade equipment on either end of the cable in order to increase throughput (the "black-boxes" are the only significant factors in transmission speed limitations).

    Combining this with Verizon's superior domestic customer service (no transfers 20 times to heaven-knows-where-in-the-world, no 20-minute hold times, no script-monkeys at tech support that barely speak English, etc.), their superior fiber technology training centers, and its CDMA cel technology, the only limiting factor in this company is the highly-proprietary nature of their cel technology (it does not provide SIM-cards that can be swapped when going overseas, like GSM does). If Verizon made their cel services less proprietary, and enhanced their CDMA overseas capabilities, the sky would be the limit. I would even accept a cut in the already-rich 6% annual dividend if I knew the money would go to a faster implementation of FIOS (and subsequently buying out the fuddy-duddy telcos that are just sitting on the sidelines watching). I have talked directly with FIOS customers and they said they will never go back to any other media source. The quality is far superior to coax.

    I know my comments are simply a peripheral source (always do your own homework Foolishly). However, while other companies like CenturyLink, Qwest, and Frontier are fuddling around with managerial-dominated buyout-cannibalism and trying to repair old copper technology with poorly-trained old-school copper techs, Verizon is developing their 'Grande Armee', moving the bar up right under all their noses.

  • Report this Comment On April 08, 2011, at 3:01 PM, pryan37bb wrote:

    TMFBomb wrote:

    "I got a reader e-mail regarding the REIT Realty Income (O) and its 5% dividend yield. I haven't looked into the company very deeply. Anyone have thoughts on it?"

    I hear good things about it, both in terms of capital appreciation and the beefy dividend. It's one of the stocks I'm considering for my next long position, and if the housing market still looks bleak when/if I do, I'd consider writing some OTM calls against it to generate even more income, not like it needs more income with 5%, but still.

  • Report this Comment On April 08, 2011, at 4:43 PM, DMB1964 wrote:

    why haven't you considered RRD - it's div. % is higher and the stock price has been moving up?

  • Report this Comment On April 08, 2011, at 4:56 PM, Dividendpartisan wrote:

    I am Long ADP, ABT. pryan37bb, I love Realty Income (O). It is a bit expensive now, but is a great dividend pick. www.dividendpartisan.com

  • Report this Comment On April 08, 2011, at 6:59 PM, skat5 wrote:

    Annand,

    There are 100 'aristocrats' listed on this site, not the 42 from SP:

    http://dripinvesting.org/Tools/dripspreadsheet.htm

    seems the list has some variability, depending upon who compiles it. Hard to figure how one could be out of date, given the time frame. Possibly SP excludes those that have not had a dividend increase in more than a year.

    iamlard,

    you are more daring! I even divide the Aristocrat list between those companies that have more than 40 years of dividend increases and those with 'only' 25 to 40. However, I can see looking through the ranks of the contenders for those with a big moat and good growth. Some of the 'aristocrats' look long in the tooth. Also, when certain persons take a position, I start selling on their bump: e.g. CLX, before they can convert a good long-term thing for everyone into a short-term thing mostly for themselves.

  • Report this Comment On April 08, 2011, at 7:14 PM, kyith wrote:

    how come my post didnt come out.

  • Report this Comment On April 08, 2011, at 11:04 PM, NoVaAmPro wrote:

    Regarding Realty Income Trust (O), I'm a fan and an investor. They keep bumping up the dividend every quarter (okay, so it's fractions of a penny lately, but better up than down), and having bought during the dips, my effective yield is over 9%. Very stable business model - net-leasing commercial property to big names like Taco Bell and Jiffy Lube. They pay monthly, and their annual report is written to educate individual shareholders. Your mileage may vary, of course, but this one of the star performers in my portfolio.

  • Report this Comment On April 09, 2011, at 10:04 AM, RockyTopBob wrote:

    All,

    I agree with Anand’s post on ETFs, but the scope of it is beyond the subject of dividend picks, although the inclusion of bond diversification in Target Retirement Funds is a widely recommended stance. Since the goal of such an article is to remind investors of the long term benefit of sustained dividend paying stocks, but those with less risk than the REITs or companies with poor financials, such a goal is better met with wide diversification. I agree with his ETF family, Vanguard, because of their history of being one of the best Mutual Fund investment groups, now well represented with low cost (typical 0.2 % expense ratio) ETFs, which do not carry the burden of mutual fund managers.

    So, since dividends are the topic, Vanguard’s VIG (2.32% Div yield) and VYM (2.96%) are the ETFs developed to meet the long term dividend investing goal with wide diversification (less risk). Let the professionals there do the legwork. Look at their top 10 holdings. Buy with regular periodic contributions, then sit back and watch your money grow over the long term.

    TMF would not post this as an “article” because it couldn’t advertise any of their services holding individual stocks, but all those appearing in their disclosure are good stocks.

    Disclosure: I own VIG, but have no association with Vanguard.

    Bob

  • Report this Comment On April 09, 2011, at 11:09 AM, tk77mann wrote:

    I do not trust the dividend from ED (or from many other electric utility stocks, for that matter). Its dividend is NOT covered by its free cash flows, so it issues new shares and debt annually to cover the dividend. (Robbing Peter . . . . )

    This is the case with most electric utility stocks. They may be raising their dividend annually, but eventually, if the stock and/or debt market stops wanting more securities from them, they will have to slash their dividend, which will cream their stock price.

    Electric utilities are very often subject to the whims of the state rate commissions. And if, for political, non-economic reasons, the rate commission does not raise rates to fully cover costs, the shareholder gets whacked.

    This is why it is critical to consider free cash flows even more critically when looking at dividend-paying stocks. Earnings are an accounting estimate; cash flow is where dividends are paid from.

  • Report this Comment On April 09, 2011, at 2:49 PM, iamlard wrote:

    @skat5

    There is a difference in how the dividend aristocrats list and the champions/contenders/challengers lists are determined. The aristocrats are updated once a year (first trading day of the year, if I'm not mistaken), while the c/c/c list is updated on the 1st of each month. An aristocrat can reduce/eliminate their dividend mid-year, and remain on the list untli the following Jan 1, but if a c/c/c cuts/eliminates its dividend, it is gone of the 1st of the next month. There is overlap between the two lists, but I like the more frequent updates of the c/c/c list.

    I also really like the information dripinvesting.org provides in the c/c/c list (under the "tools" link, for those of you not familiar with this site). So many of the key metrics are listed right there, all in one spreadsheet.

    I have a long time to go before retirement. I can afford to be a little more "daring" with my picks. I plan on holding my dividend payers for a long, long time, hopefully long enough to see them payout my initial investment on a quarterly basis! That would be the ideal case.

    Chris

  • Report this Comment On April 10, 2011, at 11:06 AM, TMFBomb wrote:

    @ Beans1,

    CTL was the only telecom eligible.

    @Gbreadman and DMB1964,

    Verizon and R.R. Donnelly weren't in the group of 42 Dividend Aristocrats, so they couldn't be considered for this article.

    @pryan37bb and NoVaAmPro,

    Thanks for the thoughts on O!

    @tk99mann,

    Good thoughts on utilities. Remember that I had to pick exactly one from each of the 10 sectors.

    @oldfart1946,

    Bob, agreed that diversification is important. My method is having a base of ETF's and mutual funds to get that diversification and then using my own stock picks to supplement. This article provides ideas for those who also want to supplement.

    Fool on,

    Anand

  • Report this Comment On April 12, 2011, at 11:24 PM, ikkyu2 wrote:

    The only reason that MO isn't a dividend aristocrat is that it spun off KFT and PM in the last decade. A certain amount of quarterly dividend went with them.

    If you added up the KFT and PM dividends to the MO dividend, the conglomerate would still make the Aristocrat list.

    Disclosure: long MO, PM.

    NLY and its like aren't even actually paying a dividend. They're paying out an REIT income distribution. NLY produces nothing and has no business operation; it's just a bond fund. Shouldn't be discussed in the same breath as real companies.

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