Investors looking for steady income streams often start with "Dividend Aristocrats" -- stocks that have raised their dividend payouts annually for at least 25 years straight. The list includes household names like McDonald's and Procter & Gamble, and companies you may not have heard of like Dover Corp. and American States Water.
The ability to consistently increase dividends over an extended time period shows the company's commitment to rewarding shareholders and its ability to guide the business through good times and bad. However, being on the list today is no guarantee that these companies will be able to extend their streak another 25 years raising as stocks fall off the list just as often as they make it.
With that in mind, it may be better to look at stocks that are on their way to joining the club rather than those that are already part of the elite group. Below, three of our analysts submit their pick for future Dividend Aristocrat.
Brian Feroldi: Payment processing giant MasterCard (MA 0.76%) might strike you as an odd choice for a future Dividend Aristocrat as it has only raised its dividend for five years in a row, but I think it has as good of a chance as any other company of eventually making the cut.
My confidence in MasterCard's future dividend potential stems from the fact that electronic payments still account for less than 20% of transactions worldwide. That's an amazing statistic, especially when you consider that credit and debit cards have been widely available for decades, and they are far more convenient to use than cash or check. I'm a big believer that more and more consumers will warm up to plastic over the coming decades, which should be hugely beneficial to MasterCard's business.
For investors, this trend could prove to be a windfall, as it doesn't cost the company much to add new customers to its network. That means that MasterCard should be able to grow its revenue at a faster pace than its expenses, which will quickly expand margins.
The company's recent results confirm that this scenario is taking place. On a currency-neutral basis, it reported 9% growth in revenue but only a 4% growth in operating expenses. That combination allowed operating income to rise much faster than revenue, and its regular share repurchase program turbocharges its earnings per share growth.
Anyone who is only interested in MasterCard today for its dividend is likely to be disappointed, as its current yield of 0.89% is well below that of S&P 500. However, MasterCard investors should know that the company is plowing its excess capital into its share repurchase program -- a move I support -- and its dividend only consumes about 19% of its free cash flow. That gives it plenty of room to raise its payout at a rapid rate in the years ahead.
Add it all up, and I think MasterCard stands an excellent chance of finding its way onto the Dividend Aristocrat roster one day.
Keith Noonan: With 24 years of dividend growth under its belt, Linear Technology (LLTC) has just one more year to go before it earns the official tile of Dividend Aristocrat. The semiconductor company's current yield sits at roughly 2.8%, and its payout has risen about 33% over the last five years, while its share price has increased roughly 28% over that stretch -- lagging both the broad market and the Philadelphia Semiconductor Index. On the other hand, the company may not deliver for investors seeking additional dividend growth. Its yield is already attractive, and a payout ratio of roughly 60%, combined with relatively slow growth in revenue and free cash flow could present obstacles to large payout increases.
Linear Technology makes chips for a wide range of devices, with its largest product segments being integrated circuits for industrial, automobile, and communications uses. The average forward price-to-earnings for S&P 500 companies sits at roughly 16, while Linear enjoys a market cap of roughly $10 billion and forward P/E ratio of roughly 22, which indicates that the stock is priced for growth.
The company may have an opportunity to provide chips for wireless service networks needed to accommodate an expanding number of Internet of Things technologies. An explosion in Internet-connected devices would bring a growing need for the sensors that will be used to collect and measure the new data streams, and increasing sales for the chips used in IoT-related sensors represents one avenue for Linear Technology to continue growing its dividend payout.
Jeremy Bowman: Costco Wholesale (COST -0.15%) is my pick for a future Dividend Aristocrat. The warehouse retailer first paid a dividend in 2004 and has raised it annually in the 12 years since then. Though it may not be able to reach the anointed Aristocrat status until 2029, there's good reason to think it will as this is just the kind of business, with its economic moat and solid cash flow, that exemplifies one.
While much of retail has faltered under the threat of Amazon and e-commerce, Costco, thanks to its warehouse membership model, has successfully bucked that trend. Comparable sales have grown by 6% or more in each of its last five years, a streak that is virtually unmatched in retail. With a membership retention rate near 90%, the business is much stickier than competitors', and its low-cost position means it should continue to prosper through a recession if one comes.
Costco also has plenty of opportunity to expand its business both in the U.S. and abroad. As of the end of its last fiscal year, it had fewer than 700 stores globally, while rival Wal-Mart has over 11,000 stores in the U.S. alone. Domestically, Costco is highly concentrated on the coasts, leaving room for expansion into the interior of the country.
Its dividend yield is only 1.1% currently, but the company has raised its dividend by an average of 12% since its first payout, a better record than most Aristocrats. It has also paid out special dividends of $5 and $7 per share in the past few years, and its payout ratio is just 30%, indicating substantial room for increased payouts going forward.
It's clear that Costco has the business model, growth prospects, and shareholder focus to make it a Dividend Aristocrat down the road.