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The Smartest Dividend Aristocrats to Buy With $500 Right Now

By Neha Chamaria – Sep 25, 2021 at 8:06AM

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In a volatile market, these Dividend Aristocrats are the best of the lot for investors.

High yields can be alluring, but dividend growth stocks are where the real money is to be made. Such stocks increase dividends from time to time, which when reinvested, can grow your initial investment exponentially. Dividend Aristocrats are among the best dividend growth stocks, having proved their mettle with at least 25 years of consecutive annual dividend increases. That's no mean feat, which is why only 65 among the S&P 500 stocks are Dividend Aristocrats today.

If you have $500 cash right now, take advantage of the market volatility and check out these three Dividend Aristocrats that are really smart buys at current prices. I've taken an exception here: One of the stocks is a Canadian Dividend Aristocrat. A Canadian stock listed on the Toronto Stock Exchange can become a Dividend Aristocrat with only five consecutive annual dividend increases, but this incredible stock easily competes with U.S. counterparts thanks to its 26-year track record. 

A beast in the making

Only three real estate investment trusts (REITs) have made it into the niche Dividend Aristocrat club so far. Realty Income (O 0.91%) is the third -- it become a Dividend Aristocrat in 2020. It's a well-deserved entrant that you'd want to buy for five reasons:

  • Its dividend yield of 4.2% is one of the highest among the Dividend Aristocrats.
  • It pays a dividend every month.
  • It typically increases its dividend every quarter instead of once a year.
  • It is targeting double-digit annual shareholder returns in the long term.
  • An upcoming merger could mean even bigger dividends for shareholders.
A senior person wearing a mask and picking vegetables at a grocery store.

Image source: Getty Images.

The last point is particularly important, as you always want to analyze what the future for a company looks like before investing in it. Realty Income has agreed to acquire VEREIT (VER) in an all-stock deal by the fourth quarter. Once complete, Realty Income's property count will increase by almost 50% to 10,300 properties, mostly single-tenant, triple net lease properties. Under triple net leases, tenants bear most of the property-related costs.

Some investors may be wary that nearly 83% of the merged company's rent will come from the retail sector, but note that it'll be a hugely diversified portfolio with consumer defensive companies like Walgreens, Dollar General, Dollar Tree, Walmart, and CVS Health's CVS Pharmacy forming is largest client base.

Also, Realty Income plans to spin off all office properties into a separate publicly traded REIT, so that takes care of any concerns shareholders may have about the future of office spaces in a pandemic world.

Last quarter, Realty Income raised its 2021 adjusted funds from operations (AFFO) guidance to $3.465 per share at the midpoint. The merger is expected to immediately add 10% or more to its 2021 AFFO. The prospects are compelling, considering the stock currently trades at only about 19.6 times 2021 AFFO and yields 4.2%.

This Dividend Aristocrat keeps proving critics wrong

Caterpillar (CAT 1.21%) shares are almost 23% off their 52-week highs, and the dividend yield is a good 2.3%, making it a really smart Dividend Aristocrat to buy at current prices.

2020 was a tough year for Caterpillar but it has bounced back strongly since. In its second quarter, the company grew revenue by 29% year over year and more than doubled its operating profit.

Importantly, many feared the cyclical stock could fail to keep its dividend streak alive. Yet Caterpillar increased its dividend by 8% in June, marking its 27th consecutive annual dividend increase. It also resumed share repurchases in the second quarter.

During its second-quarter earnings call, Caterpillar's management stressed how it intends to return substantially all of its cash flows from core machinery, energy, and transportation (ME&T) businesses to shareholders "through cycles." In other words, even in a down year, Caterpillar should continue to increase dividends. Also, it generated $3.4 billion in cash flow from ME&T through the first half of the year, and is targeting $4 billion-$8 billion for the full year.

Remarkably, Caterpillar's free cash flows are hitting all-time highs (note the bold line in the chart below), so the stock clearly deserves a higher valuation. The business environment is supportive too, what with construction spending in North America rising and oil and gas and mining companies spending more than last year thanks to the recovery in commodity prices. I expect Caterpillar to deliver strong third-quarter numbers one month from now, and with President Biden trying hard to pass his trillion-dollar infrastructure bill into law, Caterpillar is a stock to buy in every market crash.

CAT Chart

CAT data by YCharts

The powerful Dividend Aristocrat no one told you about

You won't find Enbridge (ENB -0.83%) among the list of U.S. S&P 500 Dividend Aristocrats as it's a Canadian company, but it's a beast of a Dividend Aristocrat that often flies under investors' radars.

Enbridge is one of the largest energy infrastructure companies in North America -- by its estimates, Enbridge exports 25% of North America's crude oil and transmits 20% of the total natural gas consumed in the U.S. through its huge pipeline network.

Some income investors are wary of stocks in volatile sectors like energy, but here's the thing: Enbridge functions more like a utility, as 98% of its services are contracted, which means the company keeps storing, transporting, and delivering oil and gas regardless of where the oil and gas markets are. And that is why Enbridge has been able to increase dividends every year for 26 consecutive years at a torrid compound annual rate of 10%. Patient shareholders who reinvested dividends have reaped big returns.

ENB Chart

ENB data by YCharts

Enbridge just made a huge growth move by acquiring privately held Moda Midstream Operating for $3 billion in a deal that will expand Enbridge's export capacity along the crucial Gulf Coast oil and gas hub and be immediately accretive to its cash flows. 

With the stock markets volatile and Enbridge yielding a hefty 6.7%, this Dividend Aristocrat is among the few you'd want to buy hand over fist right now.

Neha Chamaria has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Enbridge. The Motley Fool recommends CVS Health. The Motley Fool has a disclosure policy.

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