Dividend Aristocrats are members of the S&P 500 that have increased their base dividends each year for at least 25 consecutive years. Being added to and staying on the list deserves bragging rights. It's also a clear indication that each company has stayed committed to its dividend through various business cycles.
Colgate-Palmolive (CL 1.02%), McDonald's (MCD 0.40%), and Caterpillar (CAT 0.43%) are three Dividend Aristocrats from three different sectors. Whether you're a retiree looking for a stable source of income -- or simply looking to add stability to your portfolio -- each company looks to be a great buy now. Here's why.
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1. Colgate-Palmolive
Colgate-Palmolive is one of the longest-tenured Dividend Aristocrats. The company has raised its dividend for 58 consecutive years and yields 2.1%. Colgate's dividend streak is impressive on its own, but the company is performing well too.
Third-quarter revenue came in 5.5% higher than the same period last year. Earnings per share (EPS) was 21% higher. The company is now guiding for full-year 2020 mid-single-digit net sales growth and double-digit EPS growth.
Colgate is a truly international company, generating sales across every continent with no one business segment generating more than 25% of sales. This diversity, along with stable demand for Colgate's products, has helped the company grow its top and bottom line regardless of the business climate.
2. McDonald's
McDonald's has generated an impressive 44 consecutive years of dividend increases. It just raised its quarterly dividend from $1.25 per share in September to $1.29 per share in December. McDonald's yields 2.4%.
As discussed on a recent episode of Motley Fool Money, McDonald's posted somewhat mixed third-quarter results, as revenue declined 2% but diluted EPS increased 11%. For the nine months ended Sept. 30, 2020, revenue is down 13% and diluted EPS is down 23%.
CL Total Return Price data by YCharts
McDonald's performance isn't as consistent as Colgate-Palmolive. But unlike Colgate, McDonald's has outperformed the market over the past five years. The strength of McDonald's drive-thru and curbside sales -- partly in thanks to its mobile app -- has helped the company produce decent results so far this year. The McDonald's app is the third-ranked food and drink app on the Apple App Store and ranks fourth on the Google Play Store.
Recent rollouts like spicy chicken McNuggets and "multi-cultural brand advocates" like the Travis Scott Meal are showing signs of success. McDonald's plans to continue releasing similar combos in the future.
3. Caterpillar
Caterpillar is one of the most well-known construction stocks. Its massive earthmoving and industrial machinery are scattered throughout construction zones, oil fields, power generation facilities, and mines throughout the world. Lesser known is Caterpillar's status as a Dividend Aristocrat. Caterpillar has increased its annual payout for 26 consecutive years, an impressive accomplishment for a cyclical industrial stock.
Caterpillar has had a challenging year, but there's reason to believe a coronavirus vaccine could send its shares to a new all-time high. In its third quarter, Caterpillar management expressed optimism, citing a return to growth in 2021. The company posted much better top- and bottom-line results in the third quarter. Similar to McDonald's, its business is showing signs of improvement as the worst of the pandemic seems to be in the past.
Caterpillar's diverse source of income makes it one of the best industrial Dividend Aristocrats. This has been especially apparent in 2020, as North America has been one of Caterpillar's worst-performing segments. However, its strength in other regions of the world, especially Asia/Pacific, has helped the company produce decent results. Caterpillar's free cash flow (FCF), which can be used to pay dividends, has consistently exceeded its dividend distribution.
CL Free Cash Flow (Quarterly) data by YCharts
Like Colgate and McDonald's, generating FCF in excess of its dividend is a sign that Caterpillar can sustain and grow its payout over time. Shares of Caterpillar yield 2.4%.
An elite basket
Colgate-Palmolive, McDonald's, and Caterpillar -- as companies -- may not have a lot in common, but all three stocks are Dividend Aristocrats. Colgate-Palmolive's consistency despite market cycles makes it the safest of the three. But in the end, Caterpillar's cyclicality has produced the greatest returns over the past five years, a lesson that more risk can lead to more reward. Investors can choose their favorite of the three, but the best approach may be to invest in a basket. Equal parts of each would produce a dividend yield of 2.3% and grant exposure to different industries without compromising on the safety and reliability that comes from investing in Dividend Aristocrats.
