The list of Dividend Aristocrats includes some of the most durable companies in the S&P 500. Each of these businesses has increased its dividend payout annually for at least 25 years, an impressive feat considering the inevitable ups and downs of the global economy. Their consistency makes them great stocks to buy and hold for the long haul.
Among the best times to buy a Dividend Aristocrat is during a stock market downturn, because lower prices offer the opportunity to acquire higher dividend yields -- particularly when it comes to companies that have long records of shunning payout cuts. With that in mind, we asked some of our contributors what their favorite Dividend Aristocrats are during times when share prices are falling. NextEra Energy (NEE 0.51%), 3M (MMM -0.66%), and American States Water (AWR -0.64%) topped their lists.
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This high-powered utility rarely goes on sale
Matt DiLallo (NextEra Energy): NextEra Energy is one of the best value creators in the utility sector. It has significantly outperformed the S&P 500 and the S&P 500 Utility Index in the last three-, five-, 10-, and 15-year periods. Since 2006, the company has generated a more than 976% total return, vastly outpacing the S&P 500 (357% total return) and the utility index (nearly 242% total return).
The key to its success has been its consistent above-average growth. NextEra has grown its adjusted earnings per share at an 8.4% compound annual rate since 2005 while increasing its dividend at a 9.8% compound annual rate. Overall, NextEra has given its investors raises for 26 straight years.
Because of this success, NextEra Energy has historically traded at a premium valuation compared to other utility stocks. It currently sells for nearly 30 times its forward earnings, whereas its closest peers fetch less than 20 times forward earnings. Broad market sell-offs are among the few times when shares of NextEra trade at more attractive valuations and dividend yields.
That was the case earlier in the year. Shares tumbled more than 20% amid the market sell-off and the unexpected news that its longtime value-creating CEO was retiring. That decline pushed NextEra's forward PE ratio closer to 25 and its dividend yield above 2%. That buying opportunity didn't last long. NextEra has already clawed back more than half of its decline.
NextEra expects to continue growing its earnings and payouts at above-average rates. Because of that, investors should consider putting it near the top of their shopping lists for the next stock market sell-off, when they could scoop up shares of this high-quality utility at a more attractive price.
Diversifying off its core
Reuben Gregg Brewer (3M): There's no such thing as a perfect investment. Every single company has warts, some larger than others. Diversified industrial giant 3M's big problem today is a collection of lawsuits that could cost it a lot of time, energy, and money to solve. Investors are justifiably worried, so the stock price has slipped. But share prices and dividend yields move in opposite directions. The only times in recent memory that 3M's yield has been higher than its current 4% were during the 2007-2009 recession and the 2020 pandemic-driven market sell-off and the brief recession that followed.
MMM Dividend Yield data by YCharts
Now step back and recognize that 3M has increased its dividend annually for more than six decades. It's not just a Dividend Aristocrat, it's a Dividend King. It has a roughly $80 billion market cap and its balance sheet is investment grade. Its financial-debt-to-equity ratio is a tiny 0.17 times, and its operating cash flow covers its interest expenses 16 times over. This is not a beleaguered company praying to catch a break. It's a financially strong industry leader defending itself in lawsuits that are, basically, bound to happen at times to a company with its manufacturing focus and broad product and customer diversification. The situation may not be pretty, but the chances are high that 3M will maneuver through it without too much difficulty.
If you can think like a contrarian and look at the long term, 3M stock appears attractive at current levels. And particularly for income investors, it will only get more and more so if the price continues to decline.
This stock could multiply your wealth without your realizing
Neha Chamaria (American States Water): You probably already know Dividend Aristocrats are among the safest dividend stocks you can own, but it's nothing short of a golden opportunity when the share price of a company that has raised its payouts annually for more than six decades is falling. American States Water is one such stock. It's down almost 16% so far this year.
In fact, American States Water is more than just a Dividend Aristocrat -- it's the Dividend King with the longest-running streak of payout hikes at 67 consecutive years. No other publicly listed company in the U.S. has ever topped that.
So why's the stock falling, you may ask? It's partly because American States Water missed revenue estimates in its last quarter, and partly because investor focus has lately shifted to industries benefiting from the ripple effects of Russia's invasion of Ukraine. American States Water is, after all, a water utility with a stable, predictable, and resilient business that rarely ebbs and flows with the economy.
2021 was a strong year for American States Water. Its earnings per share grew by 9.4% thanks to low costs and the company's power to pass on rising water supply costs to consumers. Management is targeting a compound annual growth rate of at least 7% in its dividend payouts over the long term. That's a solid policy, and it could, in fact, dole out much bigger increases if history is anything to go by. Its dividends averaged compound annual growth of almost 10% between 2011 and 2021.
The prospect of growth like that is exactly why this 1.7%-yielding stock should attract you every time a price slide makes it a better bargain.
