Dividend stocks remain one of the most popular ways investors get income from their investment portfolios, and among dividend stocks, few have the reputation that the Dividend Aristocrats inspire from dividend investors everywhere. In order to qualify as a Dividend Aristocrat, a stock has to be a member of the S&P 500 (SNPINDEX:^GSPC) and have a 25-year track record of raising its dividend each and every year. As the more than 440 companies in the S&P that aren't dividend aristocrats can attest, that's a tough feat to accomplish.
Currently, there are 54 companies among the S&P Dividend Aristocrats, and there aren't any stocks that look poised to make the list in 2015. But within the next few years, several high-quality dividend stocks should approach the 25-year mark. Let's take an early look at these three aristocrats-in-the-making to see if they'd make good investments even before they assume their places among the elite dividend stocks in the market.
Defending your dividends
General Dynamics (NYSE:GD) has the longest consecutive streak of dividend increases among non-Aristocrats in the S&P, with the company having boosted its payout for 23 straight years. When you consider the turmoil that defense contractors have undergone over the years, General Dynamics' record of rewarding shareholders looks even more impressive. Admittedly, General Dynamics hasn't wowed investors with a high yield, as its dividend only equates to 1.8% of its share price right now. But that's largely because the stock has climbed at a 43% annual clip over the past two years, and since 1985, General Dynamics has produced returns averaging 14% per year.
Moreover, the defense specialist has done a good job of remedying its low yield lately, boosting its dividend by more than 10% last year and at a roughly 10% rate each year since 2010. Between its Gulfstream aviation division and its wide array of military businesses ranging from submarine and naval shipbuilding to tanks, ammunition, and complex systems, General Dynamics is poised to capture more business from an increasingly uncertain geopolitical environment, and its continued success should help it keep raising its dividends -- especially as it currently pays out only about 40% of its earnings to shareholders.
Keeping customers and shareholders healthy
Representing the healthcare industry, medical-device maker Stryker (NYSE:SYK) has a 22-year track record of raising its dividends annually. Like General Dynamics, Stryker is relatively stingy with just a 1.5% dividend yield, but it too has worked hard at boosting its payout recently. Last year, the company gave shareholders a 13% payout raise, following gains of 15%, 24%, 18%, and 20% in the four preceding years.
Stryker's long-term stock performance has been equally impressive, with the company having generated almost 17% average annual returns since 1995. What's particularly impressive is that Stryker has continued its streak despite the medical-device excise tax that hit Stryker and other players in the industry with the passage of the Affordable Care Act. Given the reduced earnings from that tax, though, Stryker pays out nearly three-quarters of its earnings in dividends -- leaving it less room for future increases as long as the tax remains in place.
Insuring dividend success
Although it's not the only other stock with a 22-year streak of raising its dividends, insurance specialist ACE Limited (NYSE:ACE) is noteworthy for its size and its business. With a yield of 2.3%, ACE doesn't top the charts, but its consistent long-term returns of 17% over the past 20 years show the health of the business over the long run.
Much of those returns came from ACE's strong underwriting discipline, as the company managed to make it through the post-financial crisis years without ever having its combined ratio of losses and expenses climb above the amount of money it brought in through premiums. Best of all, ACE pays out less than 30% of its earnings as dividends, leaving it huge potential for sizable payout hikes in the future.
There's no guarantee that something won't happen to these three stocks over the next few years that could put their dividend-increase streaks in jeopardy. For now, though, ACE, Stryker, and General Dynamics are poised to be the next to make the elite list of Dividend Aristocrats, and their past success makes them worthy candidates for smart dividend investors to consider.
Dan Caplinger and The Motley Fool have no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.