Dividend investing is never just about yields. Nothing beats reliable, sustainable income growth over the long run because that’s where the real money’s at. Case in point: there’s a story about an Abbott Laboratories secretary who bought three shares of ABT for $180 (total) in the 1930s and turned it into $7.2 million by 2010 thanks to capital gains and reinvesting the dividends.
Now, that was a 100% true story. However, for the sake of setting realistic expectations, it may not happen to you. The person in question, Grace Elizabeth Groner, lived modestly for almost all her adult life, and today's economic circumstances are different than they were back then.
But that doesn’t mean you can’t enjoy the benefits that quality dividend growth stocks offer while easing your way into retirement. Dividends can help keep the cash flowing during tough times.
So, which stocks should investors choose? There are many, but, I like to start with the Dividend Aristocrats, companies that have paid increasing dividends over 25 years or more. But there’s more to the story than just picking “the highest yield”.
There are currently 66 Dividend Aristocrats, each with varying growth and financials. Jason Buol, SVP, Senior Portfolio Manager and Team Leader at Associated Bank, says, “Dividend yields should be considered but certainly should not be the only criteria. A high yield could indicate corporate distress, and a possible future dividend cut.”
With that in mind, I’ll screen for companies with strong fundamentals, looking at earnings & dividend growth, payout ratios, and analyst ratings.
Let me show you how.
How I Came Up With The Following Stocks
Using Barchart’s Stock Screener, I started my analysis by using the following filters:
- Watchlists: Aristocrats. The Barchart Watchlist is another feature that I often use when looking for great dividend stocks. As you can see, I keep various lists, each centered on a theme (Dividend Kings, Monthly Dividend Stocks, etc). For now, I’ll keep the analysis within the Dividend Aristocrats list.
- 5-Year Dividend Growth: 50% or more. The 5-year dividend growth filter measures the change in a company's dividends over the past five years, comparing the current dividend to its level five years ago. It gives us a solid idea about the company’s dividend growth trajectory. Also, 50% over 5 years roughly emulates the average 10% annual return of the S&P 500.
- Current Analyst Rating: 3.5 (Moderate Buy) to 5 (Strong Buy).
- Dividend Payout Ratio: 60% and below. The dividend payout ratio tells us how much of the company's earnings is paid to shareholders as dividends. I set this filter at 60% or below to limit the results to companies that can grow their income to match their dividend payments. You see, a company can pay 70%, 80%, or even more than 100% of its earnings as dividends, which means its dividend “growth” over five years is unsustainable. I’m trying to avoid those.
- Annual Dividend Yield: Since I won’t be arranging my results on the highest yields, I’ll limit the yields to above 2%. That way, investors can start with a decent yield while enjoying long-term growth.
This set of filters yielded exactly three results:
I arranged them from highest to lowest 5-year dividend growth. Now, let’s talk about these three high-growth Dividend Aristocrats, starting with the top one:
Target Corp (TGT)
Target Corporation is a major retailer operating a nationwide chain of department stores offering a wide range of products, including apparel, home goods, electronics, and groceries, with a strong focus on exclusive brands, competitive pricing, and an extensive digital presence. The giant retailer has nearly 2,000 locations and 62 supply chain facilities in the US to keep the merchandise flowing.
Source: Barchart.com
Target’s 5-year dividend growth is at 73.02%, while its earnings growth has relatively kept pace at 65.86% over the same period. Indeed, I’m not surprised that Target’s current dividend payout ratio of 46.61% has been sustainable. Meanwhile, the company pays a dividend of $1.12 quarterly, translating to a $4.80 annual rate and a 3.82% yield.
NextEra Energy (NEE)
NextEra Energy is a renewable energy company that generates wind, solar, and nuclear power while operating regulated utility services. It focuses on sustainable energy solutions, grid modernization, and reducing carbon emissions to drive long-term growth. The company is in 49 US states and 4 Canadian provinces, making it one of the world’s largest renewable energy and battery storage companies.
NextEra pays 56.65 cents per share quarterly, reflecting a $2.26 annual rate and a decent 3.20% yield. The company has raised its dividends by 64.80% in the last five years, while its earnings have gone up by 64.11%—practically the same, giving me the impression that NextEra will increase its dividend payments in line with its earnings. Meanwhile, it maintains a 59.96% dividend payout ratio.
Atmos Energy Corp (ATO)
Atmos Energy Corporation is a natural gas utility company that distributes and transports natural gas to residential, commercial, and industrial customers. It operates one of the largest natural gas pipeline systems in the US. The company operates in eight southern states and serves over 3 million customers.
Like the other companies, Atmos Energy keeps its dividend growth in line with its earnings growth. Namely, dividends grew 53.33%, while earnings increased by 57.01% in the last five years. It also has a safe 46.43% dividend payout ratio.
The company recently increased its dividends to 87 cents per share from 81 cents quarterly, bringing its annual rate to $3.48, which translates to a 2.32% yield.
Final Thoughts
These three companies offer safe and reliable income through consistent dividends. By evaluating the fundamentals like the payout ratio and confirming that earnings can keep pace with dividend growth, you can have a better idea whether a company is a sound investment. Of course, nothing is set in stone, and anything can change. So, keep your eyes on the news and always do your due diligence.
