As I've been working my way through Dow Jones Industrial Average's (DJINDICES:^DJI) dividend aristocrats, I've come to realize a few qualities that the Dow's nine dividend aristocrats all share. Today I'd like to share my findings, to help you the next time you're trying to decide which dividend-payer to buy next.
First and foremost, all nine of the Dow's dividend aristocrats are consumer-facing companies. While Coca-Cola (NYSE:KO), McDonald's, Procter & Gamble (NYSE:PG), Johnson & Johnson, AT&T (NYSE:T), 3M (NYSE:MMM), and Wal-Mart may seem like consumer-facing companies more than Chevron or ExxonMobil, the average consumer is probably more reliant on Chevron and Exxon than any of the other names. Without oil and gas, consumers aren't going to McDonald's or Wal-Mart to buy the products the other companies make, and if people buy those products online, they won't get them delivered if the courier trucks can't fill up their tanks.
But all nine companies, like all great dividend-paying stocks, sell products that are not only necessary, but are necessary to the average consumer. Countless studies suggest that once customers get used to a certain brand or product, they stick with it for a long time, through good and bad economic conditions. That holds true with the Dow's aristocrats. Coke is the second strongest worldwide brand out there, which is one reason I believe the company has been able to not only pay its dividend, but also to increase its dividend amount every year since 1963. The same could be said for Procter & Gamble's numerous household-product brands, 3M's Post-it notes or household tape products, and J&J's Band-Aid's brand. These are products we buy and use in about the same quantity regardless of whether the stock market is falling or rising, regardless of whether the government is shut down or open, and regardless of political tensions in the Middle East.
Investing in companies that sell products average consumers use on a regular basis is the best form of portfolio protection, because while housing, automobile, electronics, or other luxury-item sales may decline during a recession, people are always going to keep buying everyday household cleaning products, beverages, and gasoline.
A large-ticket item may not seem like a big deal when you have job security, asset values are rising, and life is generally good. But when you see your co-workers getting laid off, your 401(k) is declining, and the headlines get too scary to read, then a new house or car, or even a $1,000 TV, is probably out of the question.
But since one-time items and super-non-durable goods, like gas and laundry detergent, will be bought and consumed no matter what, the companies selling those products are less likely to feel the bad times than homebuilders and carmakers. Sure, they're also less likely to experience a massive sales increase when the economy is in good shape, but after all, the slow and steady tortoise did beat the hare.
Easy adaptation to changing preferences
Since the world is always changing, and consumer preferences change with them, companies have to adapt. That means changing their products. The best companies do just that, whenever it's needed, and they make it look easy. The Dow's dividend aristocrats are a perfect example. Coke has added to its product offerings, and McDonald's has changed its menu items, to accommodate more health-conscious consumers. Ma Bell has transformed from a landline to mobile-service provider and is now delving into data services. And Chevron and Exxon have gotten more involved in the natural gas industry now that the U.S. finds itself in an energy boom.
Surely not all of these changes were easy to make, but the companies were successful in carrying them out, and they've become stronger by offering more products and services to their consumers. In the case of the Dow, that's what makes them aristocrats.
Fool contributor Matt Thalman owns shares of Johnson & Johnson. Check back Monday through Friday as Matt explains what caused the Dow's winners and losers of the day, and every Saturday for a weekly recap. Follow Matt on Twitter: @mthalman5513.
The Motley Fool recommends 3M, Coca-Cola, and Procter & Gamble and owns shares of Coca-Cola. 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.