Dividend aristocrats come with at least 25 years of uninterrupted dividend increases. It's an elite club that includes just 51 stocks from the S&P 500 index and only eight of the 30 Dow Jones Industrial Average (^DJI +0.04%) members.
Joining this exclusive collection of supremely devoted dividend payers takes decades, but there's no time like the present. Here, three Motley Fool contributors will take a look at some likely candidates for the dividend aristocrats list in the far future. Neither Walt Disney (DIS 2.84%), nor Cisco Systems (CSCO +1.48%), or even Starbucks (SBUX +0.77%) can boast more than four years of unfailing dividend boosts -- but they all show the signs of stellar dividend policies to come.
Image source: Cisco
Anders Bylund (Cisco): Income investors crave a long history of generous dividend increases. They also prefer dividends powered by solid cash flows, with headroom left over for even more payout boosts in the future. Furthermore, dividend investors like businesses with proven staying power -- buy once, stuff the shares under your mattress for decades, and never worry about the company going under while you sleep.
Cisco Systems delivers on most of these income-investing criteria. The networking giant strikes out when it comes to presenting a long dividend history, having offered its very first payout just three years ago. With such a short dividend record, it may seem strange to highlight Cisco as the next potential dividend aristocrat.
Well, you have to start somewhere. Even the longest-lasting dividend kings once looked back at just a few years of modest payouts, and no stock could become the next dividend aristocrat if it were already a member of that exclusive club.
From a fundamental point of view, Cisco has been a leader in its tightly defined networking industry since it was founded three decades ago. Challengers to the networking throne have come and gone, but Cisco remains orders of magnitude larger than its closest competitors today..
As for dividend quality, Cisco has tripled its payouts in just three years and uses just 35% of its free cash flow to underwrite those dividend checks. The current dividend yield already sits at 2.8%, in line with the average Dow Jones payout and growing much faster than your average Dow dividend.
Cisco is no dividend aristocrat today, but all the signs point to this stock joining the club in a couple of decades.
Andres Cardenal (Starbucks): Starbucks has a relatively young dividend history; the company started distributing regular dividends in 2010. However, the global coffee powerhouse is not wasting any time when it comes to dividend growth: what started as a $0.10 quarterly dividend in 2010 has now turned into a much bigger payment of $0.32 per share; this includes a caffeinated dividend increase of 23% for 2014.
Brand differentiation and a unique customer experience are key sources of competitive strength, allowing Starbucks to charge premium prices for its products and generate superior profit margins for shareholders.
Starbucks is one of the most innovative players in its industry, and it's expanding into new areas like specialized tea, pastry, and premium juice with acquisitions like Teavana, La Boulange, and Evolution Fresh, respectively. Product innovation allows the company to increase sales and attract a wider clientele; in addition, it should be a positive for profit margins in the long term, as Starbucks gets to better leverage its existing store base to sell more products.
Sales growth remains remarkably strong. As of the last quarter, total revenues increased 10% to $4.2 billion while global comparable-store sales increased by 5%, marking the 19th consecutive quarter of comparable sales growth of 5% or more. This indicates that demand is incredibly healthy, and the business is far from reaching any saturation point.
The dividend payout ratio is comfortably low, in the area of 40% of earnings over the last year. This means Starbucks has plenty of room continue raising dividends over the long term.
Image source: Disney
Joe Tenebruso (Disney): Twenty-five straight years of dividend increases -- that's an impressive distinction that separates a dividend aristocrat from the rest of the pack. When I think of a company that possesses competitive advantages that could one day allow it to accomplish such a feat, my thoughts turn to Disney.
Disney's collection of timeless brands, characters, and storylines has passed from generation to generation, delighting millions of children and adults around the world. Maybe even more impressive, Disney's global distribution network has successfully navigated through a sea of technological change, such as from VHS to DVD, and now streaming.
While bears will have you believe that the surging popularity of streaming services such as Netflix (NFLX 2.33%) will result in cord cutters quickly abandoning their cable services, thereby destroying ESPN's lucrative affiliate fees, I'm confident that Disney will once again not only survive but prosper during this latest technological transition. Sports fans will continue to pay for access to ESPN's best-in-class coverage of live sporting events, whether it's through their cable packages or a la cart programming. In fact, according to a report from Re/Code, Disney is planning a launch of its own complementary streaming service that should allow it to monetize even more of its sports licenses.
All told, ESPN, like its parent Disney, has far more staying power than some skeptics will have you believe. Fools can take comfort in their knowledge that Disney's fortresslike moat -- comprised of popular brands, hard-to-replicate assets such as theme parks and resorts, and a cash flow spewing global distribution machine -- will protect an ever-growing stream of dividend payments for decades to come.
