Dividends have made up a sizable, not-to-be-ignored chunk of historic investor returns over the past century. The bottom line? Ignore dividend-paying stocks at your peril.
But like most things that are worth it in life, such a task is easier said than done. Just when you think you've found a winner, the stock you thought would help fund your monthly retirement expenses decides to cut or even drop its dividend in the interests creating "long-term shareholder value."
Enter the dividend aristocrat: a company that not only has at least 25 years' worth of history paying a steady dividend, but of raising it on an annual basis year-in and year-out. Sounds attractive, right? Of course, but while perusing the list of companies with such a record, investors need to keep one sobering fact in mind: The list is compiled by looking at the past -- not the future. It takes a certain type of company to pay an increasing dividend payment for 50 years, which is what would be required of current list members to remain as such.
It won't be an easy task, but to get the Foolish reader started, we thought we would try something new: look for dividend aristocrats to avoid, thus narrowing the search. So, without further ado, here are three dividend aristocrats to avoid.
Keith Noonan: Lowe's (NYSE:LOW) stands out as a Dividend Aristocrat to avoid not because of any glaring deficiencies in its business or questions about its ability to deliver payout increases, but because industry competitor Home Depot looks to be a better bet over the long term. True, Home Depot is not a Dividend Aristocrat, having been more irregular with its payout increases despite never lowering its payout, but it beats Lowe's on yield and looks positioned to continue outperforming its rival.
Both companies are exposed to threats from shifting lending rates and unfavorable changes in the housing market, but Home Depot's size and location advantages could give it an edge in the event of downturn; they are currently translating to superior revenue and cash flow growth. The orange-themed hardware giant generated roughly $9.4 billion in cash flow in its last fiscal year, an increase of roughly 40% from five years prior, while Lowe's generated roughly $4.8 billion in annual free cash flow, representing only a 10% increase over the same stretch.
While Lowe's boasts a commendable, 53-year history of annual payout increases, the stock's roughly 1.5% yield is beat by Home Depot's roughly 2% yield. Home Depot has also been more aggressive with its payout increases in recent years, delivering an 192% increase in payouts over the last five-year period compared to a payout increase of 155% from Lowe's. Home Depot's payout ratio sits at roughly 43%, while Lowe's is roughly 37% -- not representative of a big difference, particularly as Home Depot has historically opted to pay out at a higher rate.
With a forward P/E of roughly 19, Lowe's is priced a bit cheaper than Home Depot -- which has a forward P/E of approximately 22, but Home Depot's dividend and business advantages make it a better buy.
Steve Symington: Target (NYSE:TGT) is widely considered among the ranks of dividend aristocrats having raised its payout in each of the past 48 years. And though the market recently rejoiced as the company turned in its fifth straight quarter of traffic growth, I think there are better places for investors to put their money to work. After all, Q4 comparable sales rose a modest 1.9%, including 1.3% traffic growth. But that included a 1.3 percentage point bump from 34% sales growth at Target's digital channel, without which Target's results look much less appealing as its physical locations continue to face mounting pressure from well-funded competitors like Amazon.com.
Amazon, for its part, just capped a blockbuster quarter in which it saw revenue skyrocket 28% year over year, to $29.1 billion. That included 21% growth in net product sales, and a 64% increase in revenue from the highly profitable Amazon Web Services segment. Of course, the latter only comprised 9% of Amazon's total net sales, but it also generated more than half of the company's operating income, providing Amazon with even more resources to invest right back into growing its core retail business -- and taking market share from brick-and-mortar-centric peers like Target. So, while Target might well continue achieving modest traffic increases in the near term, I fear it's only going to get more difficult for Target to maintain its dividend aristocrat status over the long term.
Sean O'Reilly: I hate to keep, well, continuing on the theme recommending against dividend-paying retail enterprises, but I feel a strong urge to include Wal-Mart (NYSE:WMT) in this list of dividend aristocrats that should not be bought.
As evidence that Wal-Mart's future may not be as rosy as its past, I wish to point the reader to this press release put out by Wal-Mart on January 15, 2016. Under the banner of "an increased focus on portfolio management," everyone's favorite mega-retailer announced its first-ever wave of mass store closings. A total of 269 stores had been identified as ripe for closure. Don't feel too badly for Wal-Mart, though -- it still has over 11,600 stores globally and employs 2.3 million (yes, that's right, million) people. It's so big, in fact, that the company has, across all of its remaining stores, 1.149 billion square feet of floor space. I state these facts to impress upon the reader that I do not think Wal-Mart is going anywhere anytime soon. What I am saying, though, is that Wal-Mart's growth as the dominant retailer in the United States has fueled its dividend history over the last few decades. The next 25 years will likely be trickier. After all, they don't make huge markets like the United States every day.
One might think overseas expansion will be a further engine of growth, but alas, every major attempt to replicate its American success has been rebuffed overseas. Wal-Mart will likely do reasonably well in select regions and initiatives, but store growth (with the same size of stores that are found in these United States) is likely to be wishful thinking.
Both Wal-Mart's total revenues and earnings per share figures have stalled in the last five years. In fact, earnings per share for the year ended January 31, 2016, came in at $4.58, down 8% from the previous year's $4.98 figure. It's dividend payment, on the other hand, continued to rise: $1.96 for the year compared with $1.92 for the previous year. This fact alone highlights something important. Over the last 10 years, Wal-Mart's dividend payout ratio has crept up from 22.4% to 42.8%. Mix in Wal-Mart's questionable growth avenues going forward, and you quickly realize there are likely greener pastures to search for a great dividend aristocrat in, no matter how dominant and profitable Wal-Mart appears at present.
Ashraf Eassa has no position in any stocks mentioned. Sean O'Reilly has no position in any stocks mentioned. Steve Symington has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Amazon.com. 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.