A portfolio of dividend-paying stocks can provide a source of income for your retirement. Better yet, companies with a history of increasing dividends tend to outperform the overall stock market, according to a recent study on Dividend Aristocrats. These are companies that have raised their dividends for at least 25 consecutive years.
With that in mind, let's look at three Dividend Aristocrats that could produce higher returns with lower volatility than the overall S&P 500 index.
1. Genuine Parts
Anyone who has ever needed a car part is likely familiar with Genuine Parts Company (GPC 0.18%), owner of the NAPA Auto Parts brand. The auto parts chain also sells industrial replacement parts, and its stock has been one of the rare winners in 2022, with gains of roughly 30% year to date.
The stock, priced at around $179 per share, is soaring in 2022. The company recently reported record sales of $5.7 billion for the third quarter, and management raised its sales and earnings-per-share guidance for the rest of the year.
Genuine Parts is not just a Dividend Aristocrat; it is also a Dividend King. That's a company which has raised its dividend for at least 50 consecutive years -- 66, to be exact. The quarterly dividend is now $0.895 per share, which yields 2% annually.
A key metric for any dividend stock is its payout ratio, or its annual dividend divided by earnings. Look at this to be sure the company can maintain and potentially raise its payout. Generally, if a company has a payout ratio higher than 75%, there is a higher risk of a dividend cut. Genuine Parts' payout ratio sits at roughly 41%, so you can expect it to keep raising its dividend for years to come.
2. Lowe's
Lowe's Companies (LOW 1.49%), a leading home improvement retailer, has raised its dividend for 48 consecutive years, and it's paid a dividend every quarter since going public in 1961. The company's current quarterly dividend is $1.05 per share, representing an annual yield of about 2% and a payout ratio of roughly 26%.
Beyond Lowe's impressive dividend streak, the company returns value to shareholders with an aggressive share repurchase program. Over the past two years, Lowe's lowered its diluted outstanding shares by 18% to about 620 million. By lowering its outstanding share count, Lowe's aims for its remaining shares to be worth more and makes it easier to raise its dividend each year.
Similar to the overall market, Lowe's stock has struggled in 2022 -- down about 18% year to date. However, the stock, priced at roughly $209 per share, looks underpriced compared to its historical price-to-earnings (P/E) ratio -- a common metric used to value stock prices. Lowe's currently trades at a P/E of about 17, well below its five-year average of 23. While there are concerns about rising inventories, the home improvement giant has a long enough track record of success that its stock appears on sale.
3. McCormick
McCormick & Company (MKC 0.44%), a leading manufacturer of spices and seasonings, has raised its payout annually for 36 consecutive years. The quarterly dividend of $0.37 per share represents a 1.77% annual yield and a payout ratio of 56%. Its stock, priced at approximately $84 per share, has struggled in 2022 and is down about 13% year to date, but it is still outpacing the S&P 500, which is off by about 17%.
Like many other public companies, McCormick is struggling with inflation supply chain constraints. As a result, its gross margin (sales minus cost of goods sold) fell to 35.5% in the third quarter, down from 38.7% a year ago. To CEO Lawrence Kurzius' credit, he recently committed to "aggressively eliminating supply chain inefficiencies" during McCormick's most recent quarterly earnings call.
Despite some headwinds, McCormick's sales continue to reach record heights each year. Through the first three quarters of its fiscal 2022, the company generated $4.65 billion -- up from $4.58 billion and $4.04 billion through three quarters of its fiscal 2021 and 2020, respectively.
Based on McCormick's track record, it will likely continue to raise its dividend each year and grow by acquisition. For example, it acquired Frank's RedHot, French's Mustard, and FONA International over the past five years for roughly $5 billion. While management doesn't break out figures by brand, it often calls out that Frank's RedHot is the No. 1 ranked hot sauce brand in the U.S.
If McCormick can fix its supply chain woes, expect its stock to continue to beat the S&P 500 -- just as it has over the past five years.
Are these Dividend Aristocrats buys?
Amidst an uncertain market, dividend stocks can provide stability to your portfolio with the added bonus of receiving payments each quarter. These Dividend Aristocrats, in particular, have established histories of beating the overall market, making them great additions to any portfolio.
