To qualify as a "dividend aristocrat," a company must increase its dividend payment for at least 25 consecutive years. That's no small task given today's ultra-competitive business world, so any company that makes its way onto this list is likely to be a high-quality investment.
But which dividend aristocrats do we Fools think are smart buys today? We posed that very question to a team of our Foolish contributors, and they picked ExxonMobil (XOM 0.86%), Ecolab (ECL 0.05%), and Nucor (NUE -0.61%). Here's why.
35 years and counting
Matt DiLallo (ExxonMobil): Big-oil behemoth ExxonMobil has paid dividends to shareholders for more than 100 years, including increasing the payout in each of the past 35. That means the oil giant has been an official dividend aristocrat for the past decade. Meanwhile, these raises haven't been meager increases just to keep the streak alive, as the company has grown the dividend at an average annual rate of 6.4% over that timeframe. The most recent increase came at the end of last month, when the company boosted its payout $0.02 per share, or 2.7%, which came even as the oil industry is just barely starting to emerge from one of the worst market downturns in decades.
Fueling ExxonMobil's ability to pay an ever-increasing dividend despite operating in the volatile oil market is the company's focus on generating cash flow. In fact, last year it was the only oil major to produce free cash flow, pulling in a whopping $9.7 billion. One reason the company generates so much cash is its disciplined approach to capital allocation, which includes focusing its investments on projects that drive high returns on capital. As a result, the company has consistently outperformed its rivals. Over the past decade, for example, ExxonMobil's average return on capital employed is around 20%, well above the 10% to 15% range of its big oil brethren.
ExxonMobil expects to continue reinvesting a significant portion of its cash flow into attractive investment opportunities, including a plan to invest $70 billion to $80 billion through the end of the decade. These projects should keep driving shareholder value higher while providing the company with plenty of excess cash for future dividend increases.
Squeaky-clean dividend checks
Brian Feroldi (Ecolab): Companies that specialize in sanitation and cleaning solutions tend to be stable investments since demand for their services remains fairly constant even during periods of economic stress. What's more, many industries are regulated to ensure they provide basic sanitation levels for their employees, customers, and local communities. These factors enable the industry leaders to consistently crank out profits, which they can use to reward shareholders.
No layoffs, but lots of dividends
Rich Smith (Nucor): If you like dividends, you have to love Nucor, a true aristocrat of a dividend stock that's raised its dividend 44 years in a row. At present, Nucor stock is yielding 2.5% and pays a better dividend than you'll find anywhere else among major steelmakers in the U.S.
Now, investing in the cyclical steel sector may make some people nervous. Sometimes, and for some steel companies, it seems that the only time steel investors make money is when the U.S. government gives them a hand by imposing tariffs on foreign steel imports. But while not immune to the topsy-turvy nature of the steel market, and while certainly a beneficiary of import tariffs, Nucor is also one of the best-run steelmakers out there.
Steel minimill operator Nucor boasts an operating profit margin of better than 10%, which is superior to the profit margins at more traditional steelmakers such as ArcelorMittal, AK Steel, and industry stalwart U.S. Steel. Its return on equity -- better than 14% -- similarly exceeds those of most its rivals.
Simply put, it's a quality company. And Nucor is also a company that I think can do well as the Trump administration finds its footing and begins making headway toward implementing its proposed $1 trillion plan for rebuilding the nation's infrastructure.
As a steelmaker, Nucor should benefit from new business, building the "bones" of the new highways, bridges, and airports that President Trump has talked about. At the same time, as a company that famously has a "no layoffs" policy with respect to its workers, I see Nucor as a company largely immune to Trump's occasional tweet-storms against companies he dislikes or believes to be profiting too much from government spending.
Seems to me this is exactly the kind of business that should do well over the next four years and possibly beyond.