For income investors, there's no better place to look for stocks to invest in than the S&P 500 Dividend Aristocrats list. The group, after all, comprises niche stocks that have increased their dividends for at least 25 consecutive years. Surely, only wide-moat companies with sustainable competitive advantages and cash flows can manage to hit such a milestone, making them great investment options.
But even within this enviable group, some stocks stand out. Three Dividend Aristocrats look particularly compelling right now: 3M (NYSE:MMM), Dover Corp (NYSE:DOV), and Emerson Electric (NYSE:EMR). Here's why.
The market's overlooking this dividend, but you shouldn't
3M shares have been under pressue after the conglomerate released its second-quarter earnings in late July. 3M's net income jumped nearly 23% year over year on marginal improvement in revenue, but all that the market cared about was that the numbers fell short of analysts' estimates. Mr. Market even chose to overlook 3M's upgraded guidance for fiscal 2017, which if met would mean 8% growth in its earnings per share at the lower end.
This is just the kind of opportunity a smart investor could hope for to get into a company that has proved its mettle by paying a dividend for more than 100 years and raising it every year for 59 consecutive years. Another dividend hike and 3M will become only the seventh company to have raised its dividends for a whopping 60 years or more.
As for growth, 3M's global footprint and a hugely diversified portfolio that includes more than 60,000 products under well-known brands like Post-it, Scotch-Brite, and Filtrete have helped it ride the storms and generate sustainable cash flows for decades. There's no discernible reason why the future should be any different. A dividend yield of around 2% might not be too enticing, but 3M is one of the few money-minting stocks that income investors can't go wrong with.
A potential divestment could boost this dividend stock
Dover is one of the six stocks that have increased their dividends for 60 consecutive years or more. And the company's latest numbers tell me it's all set to make new records.
Dover recently delivered bumper second-quarter earnings, upgraded its full-year guidance for the second time this year, and hiked its dividends for the 62nd straight year. It now expects 13% growth in revenue at the midpoint and 30% jump in EPS at the lower end of its guidance range.
Alhough those numbers leave little room to doubt Dover's growth potential, there's another reason why the stock is on my radar: a potential divestment of its energy business.
Dover makes equipment and components for diverse industries and operates four segments: engineered systems (industrials and consumer goods), energy, fluids (pumps and filtration systems), and refrigeration and food equipment. Energy has been a dampener ever since oil prices crashed. The Wall Street Journal estimates the business could fetch Dover $3 billion-$4 billion if sold.
Any move to separate the energy segment from its other businesses should help Dover grow its top line faster, and that should mean fatter dividends for shareholders, as management's goal is to convert 10%-11% of revenue to free cash flow. As it is, Dover's impeccable dividend track record makes it one of the best Dividend Aristocrats to own. A rejig of operations to focus on higher-margin businesses could make it even better in terms of dividend growth and yield -- the stock currently yields 2%.
A visionary Dividend Aristocrat
Like Dover, Emerson Electric has 60-plus years of dividend increases to show off. Don't let its name confuse you: Emerson isn't a utility. It is primarily an automation solutions provider that serves nearly every industry you can think of. The company operates another big segment -- commercial and residential solutions -- which provides appliances and services related primarily to heating, air conditioning, ventilation, and refrigeration.
This offbeat business mix works in Emerson's favor in two ways: On the one hand, the relatively resilient demand for its commercial and residential products acts as a buffer during difficult times. On the other, a strong foothold in automation means Emerson already has its foot in hot markets like the Internet of Things.
That also explains why Emerson has been able to generate strong cash flow and pay out higher dividends to shareholders year after year for more than six decades. The company is now coming off a major restructuring phase that included the divestment of its network-power unit in a multibillion-dollar deal. Emerson has reinvested the proceeds into growth, having recently acquired Pentair's valves and controls business. Management already has a road map outlining the company's financial goals through 2021:
If you read those numbers alongside management's target FCF payout of 40%-50% in coming years, you know you can safely expect this 3.3% yield stock to continue to reward you richly.