Meet Tomorrow's New Dividend Kings

For income-hungry investors today, solid dividends have become an essential indicator of a good investment. Lists of dividend stocks have become hugely popular, and everywhere, people pore over thousands of stocks to find the most reliable ones to count on for dependable payouts.

Whenever an important trend emerges, though, the best move is to stay one step ahead of it. So instead of looking at companies that are already on popular dividend-stock lists, the smarter idea is to look for the stocks that will be on those lists in the near future -- and then beat the herd to the prize.

The best dividend stocks in the U.S.
One of the most prestigious credentials a dividend stock can have is to gain a spot on the S&P Dividend Aristocrats list. The standards to make the list are quite simple: In order to qualify, a company has to be a member of the S&P 500 Index, and it has to raise its dividends every year for 25 consecutive years.

At first glance, you might think that it would be easy for a blue-chip member of the S&P 500 to build such a streak. After all, the S&P 500 includes cream-of-the-crop companies, stocks that have already demonstrated their strength by approaching the pinnacle of the U.S. business world.

But remember, many stocks don't even pay dividends at all. Among those that do, many don't make a habit of increasing dividends regularly. And still others may have the best of intentions but still find themselves falling short during periods of extreme economic stress. After all, even longtime dividend payers and former Dividend Aristocrats General Electric (NYSE: GE  ) and Pfizer (NYSE: PFE  ) slashed their dividends during the financial crisis, as did a host of bank stocks that were also on the list.

Once you jump through all the hoops, only a few dozen stocks make the cut, including rural telecom CenturyLink (NYSE: CTL  ) and pharma giant Abbott Labs (NYSE: ABT  ) . But in the years to come, some new up-and-comers stand to gain admittance to the Dividend Aristocrats club.

Aristocrats-to-be
When the standard for admission is 25 years, it's easy to get a jump on the competition: Just look out for stocks that are a few years shy of the finish line. Right now, you can find several stocks that are within spitting distance of the ultimate prize:

Stock

Current Dividend Yield

Consecutive Dividend Increases

Chevron (NYSE: CVX  ) 3.1% 24 years
T. Rowe Price 2.3% 24 years
Cardinal Health 2.0% 22 years
Avon Products (NYSE: AVP  ) 4.1% 22 years

Sources: Dripinvesting.org and Yahoo! Finance.

At least at the moment, there doesn't seem to be much standing in the way of these companies reaching the 25-year mark. Oil giant Chevron and drug distributor Cardinal Health both have rock-bottom payout ratios below 30%, indicating that they have plenty of room to boost dividends even if their earnings growth happens to stall out in the coming years. Similarly, T. Rowe Price (41%) and Avon Products (53%) also have reasonable payout ratios that leave plenty of room for future dividend growth, and with demand for T. Rowe Price's investment products and the consumer brands that Avon is famous for remaining strong, there's little reason to expect a big drop in earnings in the coming years.

Get your dividends
Just because a stock isn't in the S&P 500 doesn't mean it can't have strong dividend characteristics. Mercury General (NYSE: MCY  ) and Atmos Energy are among several stocks that haven't made the Standard & Poor's index but which have just one or two years left before hitting the quarter-century mark for annual dividend increases. They'll never be Dividend Aristocrats -- barring S&P adding them to the 500 index -- but they have the same steadfast finances as their aristocratic cousins.

Dividend streaks are a fun statistics, but they also show a certain type of strength that dividend investors crave. By looking not just at the stocks that have already reached the pinnacle of dividend excellence but also at those that are likely to hit the mark in the coming years, you'll broaden your horizons and increase your chances of finding great dividend-paying investments.

If getting the highest yields is more important to you than a long streak of payouts, we have the stocks for you. Check out our free special report, "13 High-Yielding Stocks to Buy Today," and get the ideas you need to boost your income.

Tune in every Monday and Wednesday for Dan's columns on retirement, investing, and personal finance. You can follow him on Twitter here.

Fool contributor Dan Caplinger has seen the future, and it's coming fast. He doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of T. Rowe Price Group and Abbott Labs. Motley Fool newsletter services have recommended buying shares of Abbott Labs, Pfizer, and Chevron. 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 Fool's disclosure policy won't wait to do tomorrow what it can do today.


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  • Report this Comment On October 19, 2011, at 10:54 AM, Gator626 wrote:

    CenturyLink has posted significant negative earnings growth the past 1-2 years. Are you confident their large dividend will sustain? The fundamentals raise a few red flags for me. If not for you, good luck - hopefully they can sustain!

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