Dividend Aristocrats are S&P 500 stocks that have paid and raised their dividends for 25 or more consecutive years. Based on their track records of consistently returning profits to shareholders, they are generally attractive companies for investors to consider buying.

Only 57 of the stocks on the list of 500 qualify for this prestigious status, including three companies we are going to take a closer look at today: water technology and hygiene company Ecolab, spice and condiment company McCormick, and branded clothing company VF Corp.

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Image source: Getty Images.

Three stocks with good earnings growth

The first thing to note is that all three companies have a history of generating strong return on equity (ROE) -- a metric which comes from dividing net income by shareholder equity. You can think of it as a measure of how much profit a company is able to generate with each dollar of shareholders' equity it receives.

ROE is a key metric to follow because it's not enough just to buy a dividend stock for its current yield -- you also want a company to be able to grow its dividend in the future.

On this measure, all three are doing well, suggesting they can generate good earnings growth.

VFC Return on Equity Chart

VFC Return on Equity data by YCharts

What future return can you expect from these stocks?

Using an approximation for ROE and the current dividend payout from earnings, it's possible to calculate the theoretical rate at which each company can grow its dividend over time. Moreover, you can use the so-called Gordon Growth Model (which assumes the value of a stock is equivalent to the future value of its dividends) to calculate the theoretical annual return that each stock might generate.

As you can see below, McCormick comes out on top (at least theoretically), but VF Corp. and Ecolab also offer double-digit returns:

Company

Return on Equity

Theoretical Growth Rate

Dividend Yield

Theoretical Rate of Return

VF Corp. (NYSE:VFC)

21.11%

9.08%

2.3%

11.3%

McCormick & Co. (NYSE:MKC)

24.35%

13.97%

1.4%

15.3%

Ecolab (NYSE:ECL)

17.12%

11.74%

1%

12.7%

Data source: Morningstar.com. Calculations by author: Return on equity = net income / shareholder equity; theoretical growth rate = RoE*(1-dps/eps); dividend yield = dps/P; theoretical rate of return = (dps/P)+g.

These calculations are fine and serve a purpose, but they are based on backward-looking data. The key question is whether these companies can continue to generate the earnings that have led all three stocks to massively outperform the S&P 500 index over the last decade:

VFC Chart

Data by YCharts.

VF Corp.

The performance of VF Corp., which produces activewear and outdoor-wear brands such as Timberland, Vans and The North Face, has been admirable in a rapidly changing retail environment. But if you're making an investment decision for the next decade based on the last decade, there are a couple of considerations to be made.

First, the previous decade's earnings were generated with brands like Wrangler and Lee as part of the equation. Those brands were spun off into their own company -- Kontoor Brands -- in May 2019. Second, the company's recent margin history has been patchy:

VFC EBITDA Margin (TTM) Chart

VFC EBITDA Margin (TTM) data by YCharts.

That said, management's plans call for operating margin to expand from 13.8% in 2020 to over 15% in 2024. This will be driven by shifting revenue toward higher-margin direct-to-consumer (DTC) sales from wholesale. DTC sales are expected to be 49% of sales in 2024, up from 38% in 2019. It's an interesting story, but you have to believe in it in order to buy the stock.

McCormick and Ecolab

While there are some question marks around the trends in VF Corp.'s margin, there are none around McCormick and Ecolab. Both companies have generated good margin expansion and ROE trends:

MKC Operating Margin (TTM) Chart

MKC Operating Margin (TTM) data by YCharts.

In addition, both companies have strong end-market trends behind them. For McCormick, it's demographic and cultural changes that are producing a growing demand for spicier food. The company has a dominant position in this niche market. That said, the perennial question with McCormick is whether its market position in the consumer segment will be threatened by store brands, while there's no shortage of competition in the flavor solutions business.

Ecolab's focus on food, water, and healthcare markets, and the fact that 90% of its revenue comes from recurring sources, ensure it has relatively stable sales growth. Management has further reduced the cyclicality of its sales by recently agreeing to separate its upstream energy business -- which negatively impacted the business in 2015-2016, when oil prices slumped -- and merge it with Apergy.

ECL Revenue (TTM) Chart

ECL Revenue (TTM) data by YCharts.

It's a move that the market immediately welcomed. And it strengthens the case for buying the stock, as a play on increased awareness of the need for hygiene in the public environment.

Investor takeaway

Of the three, VF Corp. probably faces the most amount of uncertainty about its ability to remain an Aristocrat, as it executes the plan to shift its revenue mix toward more DTC from wholesale. McCormick's forward price-to-earnings ratio of more than 28 suggests investors aren't buying a stock with a discount attached, reflecting the risk of in-store competition.

All of this leaves Ecolab as probably the best-placed stock of the three to maintain its status. Trading at a forward P/E of 33, the stock isn't superficially cheap. But a very high ratio of recurring revenue, and growth prospects from regulatory and public health concerns, promise years of growth to come.