The Dividend Aristocrats are collectively known as some of the most stable and reliable long-term stocks in the market. Each of them has paid a dividend for at least 25 consecutive years, and many outperform the overall market on a consistent basis.
However, this doesn't mean all Dividend Aristocrats are great stocks to buy right now. Some might be a little too expensive relative to their peers, some may have falling revenue, and others may have uncertain futures. Here are three Dividend Aristocrats our analysts think you should avoid, at least for the time being.
Life sciences and technology company Sigma-Aldrich (NASDAQ:SIAL) has an impressive history as a Dividend Aristocrat, with 38 consecutive years of raising its payout to shareholders. Yet I wouldn't buy the stock now for one simple reason: The company received a takeover bid from Germany's Merck KGaA, and with shareholders having approved the deal, Sigma-Aldrich is likely to stop being an independent company by the middle of the year.
Sigma-Aldrich has never been the perfect example of a Dividend Aristocrat, with its dividend yield lagging well below 1% throughout the past year. Even before Merck's buyout bid lifted the stock price close to $140 per share -- the amount shareholders will receive in cash for their stakes -- Sigma-Aldrich typically had a relatively low yield compared to other Aristocrats. This acquisition makes plenty of sense for Merck, which wanted to improve its presence in the chemical and laboratory-equipment areas to complement its extensive drug portfolio. Yet most dividend investors should gravitate toward Aristocrats whose yields at least match the market average. With its relatively stingy payout, Sigma-Aldrich is arguably the Dividend Aristocrat that investors will be least disappointed to see exit the ranks of this elite club.
One Dividend Aristocrat I wouldn't buy right now happens to be one I already own: McDonald's (NYSE:MCD). This stock has more than doubled over the many years I've owned it, and it pays a substantial 3.6% dividend yield, but the company is going through a rough patch, having recently posted its first full-year revenue drop in three decades and seeing sales crater in its key market of Japan due to increased competition and some food-safety issues.
Some blame the rise of "better burger" restaurants such as Shake Shack (NYSE:SHAK), along with fast-casual eateries with better-for-you food, such as Chipotle (NYSE:CMG) -- though even Burger King is doing better than the fast-food top dog. Many critics have instead suggested that McDonald's menu has grown too complex and that by chasing fast-casual customers with menu items like wraps and fancy coffees, McDonald's is not appealing to its core lower-income customers. Changes are afoot, though. McDonald's has announced a CEO change effective on March 1, and its January sales in the U.S. and Europe ticked up a bit (though the Asia-Pacific/Middle East/Africa region fell), suggesting it might have bottomed and begun to regain its footing.
All that said, you might consider buying shares of McDonald's if you're confident it will turn itself around. The company is still generating more than $4 billion in free cash flow annually, which can be deployed in many business-building ways to boost profits at its 36,000-plus locations in more than 100 countries. The stock also yields about 3.6%. Still, it's not trading at much of a discount, given its struggles. I'd wait for a better price.
The difference between a great company and a great stock is price. No matter how excellent a company is, it's hard to overcome the cost of paying too much to own it.
Realty Income (NYSE:O) is one such company: It's excellent at what it does, but it's priced far too high by the stock market. The real estate investment trust currently trades at about 20 times its expected funds from operations (a measure of earnings) in its 2015 reporting year. That puts it well ahead of its rivals, which trade for roughly 15-18 times FFO.
On top of the high price, I think investors who buy today are stepping in front of a freight train of rising interest rates. As yields on low-risk assets such as government debt have come down all around the world, investors have turned to REITs as a way to get a higher yield in exchange for a little more risk. Should rates rise, REIT share prices will invariably come down.
It rarely pays to do what everyone else is doing in investing. And everyone, it seems, is buying REITs. I think the patient investor will be rewarded with the opportunity to buy at a lower valuation, perhaps 16-17 times FFO. And while it might not seem significant, the difference between 20 times FFO and 16 times FFO is the difference between a baseline return of 5% vs. 6.7% -- a 30% increase in immediate yields just for being patient.
Dan Caplinger has no position in any stocks mentioned. Jordan Wathen has no position in any stocks mentioned. Selena Maranjian owns shares of Chipotle Mexican Grill and McDonald's. The Motley Fool recommends Chipotle Mexican Grill and McDonald's. The Motley Fool owns shares of Chipotle Mexican Grill. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.