3 Dividend Aristocrats to Buy and Hold Forever

Air Products & Chemicals, Ecolab, and McCormick generate gobs of cash, pay handsome dividends, and are likely to survive for decades to come.

Maxx Chatsko
Maxx Chatsko, Brian Feroldi, and Demitrios Kalogeropoulos
Jul 27, 2019 at 12:23PM
Energy, Materials, and Utilities

There are thousands of publicly traded companies, but the stock market is anchored by large, established businesses. They can anchor your portfolio, too. Many of these businesses have reliable sources of revenue and do well exerting control over the factors within reach. That allows them to return value to shareholders through short-term stock buybacks or long-term dividend streams. And that can go a long way toward helping you build wealth.

We recently asked three Motley Fool contributors for a leading Dividend Aristocrat on their radars. Here's why they chose energy major Air Products & Chemicals (NYSE:APD), water and hygiene conglomerate Ecolab (NYSE:ECL), and spice and flavor house McCormick (NYSE:MKC).

A pink highlighter outlining the words cash flow in a text.

Image source: Getty Images.

Hydrogen, helium, and cash flow

Maxx Chatsko (Air Products & Chemicals): They're easy to overlook, but industrial gases drive a lot of the goods and services that make everyday life possible, from scientific research in universities to massive silicon wafer factories. Extracting, processing, compressing, and shipping all of those gases -- whether carbon dioxide and oxygen or more exotic gases like xenon and krypton -- takes a special type of expertise. Air Products & Chemicals is all too happy to serve that niche. 

The $50 billion supplier of gases and equipment has been on an impressive streak lately. In the fiscal third quarter of 2019, the business delivered record adjusted earnings per share. In the nine months ended June 30, it reported flat revenue versus the year-ago period, but managed to grow operating income over 7% to $1.54 billion in that span. It enjoyed a significant boost to gross margin and managed to slash selling and administrative costs. In fact, profits could have been even higher if not for $54 million in one-time costs related to a facility closure and cost reductions.  

While currency headwinds and a strong U.S. dollar have weighed on the business periodically in recent years, investors have been pleased with the overall trajectory. It has aggressively pursued and won new contracts without jeopardizing its long-term financial targets, benefited from the ongoing global helium shortage, and brought on new production capacity to meet customer needs.

The company increased research and development investment nearly 14% in the last year. It's also aggressively pursuing hydrogen infrastructure for refueling ground transportation vehicles, which may or may not pan out, but you can't fault the business for trying.

Most important of all, investors will find comfort in the company's long track record of beating the returns of the S&P 500 when dividends are included. Shares of Air Products & Chemicals might yield just 2%, but as a Dividend Aristocrat, it has raised its payout annually for over 25 consecutive years. Investors with a long-term mind-set might want to give it a closer look.

Four glass jars in a row, each filled with successively more coins and the last in the sequence having a plant growing out of it.

Image source: Getty Images.

Slow and steady wins the race

Brian Feroldi (Ecolab): Ecolab is a steady-eddy business that I've long admired. The company sells a variety of sanitation and cleaning solutions to a diverse customer base. This might not be an exciting business, but it's highly predictable since its customers must always maintain basic cleanliness standards to keep their employees and customers healthy. That fact allows Ecolab to crank out consistent revenue and profit growth, which Wall Street has rewarded with an ever-increasing stock price.

ECL Revenue (TTM) Chart

ECL Revenue (TTM) data by YCharts.

So how can Ecolab keep these trends intact? Management has numerous levers that it can pull to ensure that everything continues to move in the right direction.

First, the company has a long history of investing in research and development to help launch new products. Second, management uses its financial strength to buy complementary businesses. Third, Ecolab pushes through modest price increases. Fourth, management wrings out operational efficiencies to improve margins. Finally, steady stock buybacks help to lower the share count over time.

Wall Street believes that these low-risk strategies will enable profitable growth in excess of 13% annually over the next five years.That's an impressive figure for a mature business. The net income growth should allow it to continue its long history of raising its dividend, too. The payout has grown each year since 1986, which easily qualifies it as a dividend aristocrat.

The stock isn't an incredible bargain right now -- shares trade for about 30 times next year's earnings estimates -- but I think that Ecolab is such a high-quality business that investors can still earn good returns from here even though they have to pay a premium to get in.

An assortment of spices, ground spices, and spoons.

Image source: Getty Images.

Spicy but stable

Demitri Kalogeropoulos (McCormick): Thanks to a long period of rising incomes, Americans are now spending more on food at restaurants than they are on food that they prepare at home. That long-term trend has hurt many packaged-food specialists, but not the spice and flavorings giant McCormick. In fact, the company posted double-digit sales growth and surging profitability in its most recent fiscal year.

Sure, most of those gains came from McCormick's recent acquisition of new brands like French's condiments and Frank's hot sauces. But the dividend giant, which owns dozens of spices, herbs, seasonings, and flavorings franchises, is still outgrowing the industry with its core brands. 

McCormick aims for organic sales growth of around 5% each year, and is on pace to modestly underperform on that goal in 2019. Yet executives are predicting faster gains ahead thanks in part to aggressive marketing spending this year.

Meanwhile, income investors can expect bigger dividend increases given McCormick's rising profit margins and its falling debt burden. Those financial wins set the company up for many more dividend boosts ahead beyond 2018, which marked this Dividend Aristocrat's 33rd consecutive year of annual raises.