Dividend Aristocrat Winners of 2012: Part 1

For several years now, abysmal savings rates have prompted hordes of investors to turn to dividend stocks. And dividend-paying stocks still remain very attractive. But which of these stocks were the winners of 2012 -- and might they perform as handsomely in 2013? 

Crowning royalty
The Dividend Aristocrats list is composed of roughly 50 companies that adhere to high-dividend-paying standards. To be considered part of the elite group, a company must boast a consecutive streak of 20 years of dividend increases. The list is re-evaluated every year and rebalanced each December, with the subpar companies given pink slips. Occasionally, new companies are added to the list.

Let's take a look at Dividend Aristocrats that enjoyed a fantastic 2012. Then we'll look at what 2013 may have in store for these companies. 

Company

2012 Stock Price Increase

Dividend Yield

5-Year Dividend Growth Rate

Sherwin-Williams (NYSE: SHW  )

69%

1%

4.1%

PPG (NYSE: PPG  )

59%

1.7%

2.6%

Lowe's (NYSE: LOW  )

39%

1.8%

16%

Cincinnati Financial (Nasdaq: CINF  )

28%

4%

3%

Franklin Resources (NYSE: BEN  )

27%

0.9%

80.4%

Sources: Yahoo! Finance, The Motley Fool. 

Last year, Sherwin-Williams and PPG stocks increased nearly 70% and 60%, respectively. Home-improvement retailer Lowe's stock returned nearly 40%. Meanwhile, both financial services stocks Cincinnati Financial and Franklin Resources returned close to 30% each. By comparison, the S&P 500 returned roughly 12% last year. 

Deeper dive
Each of these companies increased their respective dividend during the past five years. But only Lowe's substantially increased its dividend in 2012. In the wake of the housing downturn, Lowe's reliance on this industry hurt the company substantially. But the beginning signs of a comeback in the housing sector gave Lowe's an enormous boost in 2012. The home-improvement retailer should continue to benefit from a steady economic recovery.

Meanwhile, trouble may be looming for the dividend of property and casualty insurer Cincinnati Financial. Its nearly unsustainable 96% payout ratio suggests nearly all company earnings are paid out to shareholders in the form of dividends. Of the five companies mentioned above, Cincinnati Financial's five-year dividend growth rate is one of the lowest.

By comparison, coatings maker PPG and paint manufacturer Sherwin-Williams both boast low dividend payout ratios. PPG possesses a 39% dividend payout ratio, and Sherwin-Williams boasts an even lower ratio of 30%, suggesting both companies have room to significantly grow their dividends in the future. Both companies participated in a flurry of merger and acquisition activity in 2012. Sherwin-Williams acquired two companies last year, one of which will bolsters the company's Latin American presence. Last quarter, the company grew earnings more than 30% year over year. 

Looking forward
Sure, these companies had a great run last year. But are any of them slated for a repeat performance in 2013?

For starters, we can turn to a rough valuation metric for direction. While the overall market is trading at a price-to-earnings ratio near 17, all of the stocks mentioned above -- except Franklin Resources -- currently trade at P/E ratios greater than the market. Sherwin-Williams and PPG -- 2012's heavy hitters -- hold P/E ratios of 29 and 23, respectively. Meanwhile, asset manager Franklin trades near 14, suggesting the stock may be undervalued.

Stocks with attractively low valuations often indicate something funky is brewing at the company. Depending on which type of investor you are, you'll either turn up your nose or salivate over a potential buying opportunity. If you're the latter, Franklin Resources stock is worth a look.

Even though Franklin pays a modest dividend, its low 34% payout ratio signals the company can handily increase its dividend in the future. The California-based asset manager has grown its dividend substantially during the past five years and even paid a special dividend in December.

But life's not all puppies, rainbows, and a pot of gold at Franklin. Like all active fund management companies, it faces extremely fierce competition from passively managed fund shops and exchange-traded fund providers such as BlackRock (NYSE: BLK  ) , Charles Schwab, and Vanguard. In recent years, net outflows of actively managed mutual funds have affected asset managers like Franklin and will likely continue to do so.

Foolish bottom line
Will we see a repeat performance for these stocks in 2013? We Foolish investors know that last year's performance can't foretell future results. But companies that boast a long history of paying dividends and consistently declare dividend hikes provide a fantastic starting point when looking for next year's potential winners. Do your homework, weigh the plusses and minuses, formulate an investing thesis, and make 2013 a great year for your portfolio.

Take the first step toward great returns in 2013 and beyond by getting the inside scoop on what Motley Fool superinvestor David Gardner will be buying this year. He's crushed the market in his Stock Advisor and Rule Breakers portfolios for years, and now you can get a personal tour of his flagship stock-picking service, SupernovaJust click here now for instant access. 


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