Dividend Aristocrats are a select group of S&P 500 companies that have raised their dividends for a minimum of 25 consecutive years. What's particularly noteworthy about these income-generating equities is that Dividend Aristocrats, as a whole, have beaten the broader markets -- as well as the vast majority of sector-specific exchange-traded funds -- in terms of total returns on capital for the past five years.
Despite their market-beating performance, however, Dividend Aristocrats aren't known for their breathtaking yields. For instance, out of the 57 companies currently on this esteemed list, over 40% sport yields of less than 2%. In other words, Dividend Aristocrats generally aren't a great place to unearth top-notch passive income opportunities.
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There are three glaring exceptions to this general trend, however. The pharmaceutical titan AbbVie (ABBV -1.18%), the telecom giant AT&T (T 0.26%), and the oil and gas behemoth ExxonMobil (XOM -0.27%) all offer forward annual dividend yields greater than 5%. Which of these high-yield Dividend Aristocrats is the best buy right now? Let's dig deeper to find out.
How do these three high-yielders stack up?
When it comes to picking dividend stocks, there are three key criteria to consider:
- Dividend yield.
- The long-term sustainability of that yield.
- The stock's current valuation in relation to the company's long-term outlook.
How do AbbVie, AT&T, and ExxonMobil stack up on these three critical factors? In terms of forward annual dividend yield, AbbVie comes in at 5.6%, which tops the yields of both AT&T (5.3%) and ExxonMobil (5.15%). AbbVie, then, offers the highest yield among all Dividend Aristocrats.
How about sustainability? The standard metric to evaluate the sustainability of a company's dividend is known as the payout ratio, expressed as dividends per share divided by earnings per share. In the simplest terms, the higher the ratio, the harder it will be for a company to maintain its dividend at current levels.
On this metric, ExxonMobil takes the cake with a trailing-12-month payout ratio of 80.2%. AT&T comes in second place at 86.4%. AbbVie, on the other hand, lags far behind in this comparison, with a rather worrisome payout ratio of 144.5%. AbbVie's dividend payments, in other words, have been far exceeding net income over the prior 12-month period.
The payout ratio, however, doesn't tell the full story here. AbbVie is set to merge with Botox maker Allergan, which is expected to provide a significant boost to its earnings per share over the next three consecutive years. AbbVie's top line and free cash flow are also in line to get a nice lift from a trio of high-value regulatory approvals -- for Orilissa, Rinvoq, and Skyrizi -- in the coming decade.
The point is that AbbVie is in no danger of losing its Dividend Aristocrat status. In fact, the drugmaker should have no trouble raising its dividend next year, despite its unsightly trailing payout ratio. So if anything, AbbVie, AT&T, and ExxonMobil should all be considered fairly safe income plays.
How about valuation? AbbVie is the hands-down winner on this metric. The drugmaker's shares are currently trading at a paltry eight times forward-looking earnings. By contrast, AT&T's shares come in at 10.6 times forward-looking earnings, and ExxonMobil's stock sports a sky-valuation at 17.45 times forward-looking earnings.
The winner?
While all three of these Dividend Aristocrats are arguably worth buying, AbbVie stands out as the clear winner in this comparison. The drugmaker has the richest payout and the most attractive valuation, and its dividend should be safe for the long haul, thanks to management's string of successful business development activities.
