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Deep Dive

Philip van Doorn

Feb. 22, 2020, 8:56 a.m. EST

Here are 25 Dividend Aristocrat stocks screened for ‘quality’

This list is pared based on the advice of Matthew Page and Ian Mortimer of Guinness Atkinson Asset Management

By Philip van Doorn, MarketWatch


Bloomberg
Clorox has had one of the highest average returns on invested capital among the S&P High Yield Dividend Aristocrats.

Dividend stocks are always a popular topic for investors. Some are attracted to payout yields that may be much higher than bond yields. Others believe that consistently raising dividends is a good sign that a company’s management team is strong and that the stock will perform well in the long run.

MarketWatch’s Michael Brush has a list of nine secrets of dividend investing, based on his interview with Matthew Page and Ian Mortimer, who manage the Guinness Atkinson Dividend Builder Fund (NAS:GAINX) , which is rated four stars (out of five) by Morningstar. The managers give practical advice, including focusing on companies with consistent records of increasing payouts, with high returns on capital and moderate dividend yields.

A high dividend yield may be a signal that a majority of investors don’t trust the company to maintain the payout. A dividend cut is typically associated with a severe drop in a company’s stock price. A long-term investment in a quality company with a moderate dividend yield may be much better, as the company will be more likely to increase the payout over the years.

Here’s an example: If you had bought shares of McDonald’s (NYS:MCD)  at the close Feb. 18, 2015, your share price would have been $94.58 and the quarterly dividend of 85 cents a share would have made for a dividend yield of 3.59%. If you held those shares through the close Feb. 18, 2020, and had not reinvested your dividends (to keep our math simple), your share price would have more than doubled to $216.15, while the dividend yield based on your cost in 2015 would have risen to 5.29%, based on the current quarterly payout of $1.25 a share.

For someone who just bought shares of McDonald’s on Feb. 18, 2020, the dividend yield was “only” 2.3%.

Screen of U.S.-listed companies

You may have heard of the S&P 500 Dividend Aristocrats Index (S&P:XX:SP50DIV) , which is made up of the 57 companies in the S&P 500 that have increased their regular dividends for at least 25 consecutive years. That’s the criteria — it makes do difference how high a company’s current dividend yield is. You can invest in this group all together with the ProShares S&P 500 Dividend Aristocrats ETF (BATS:NOBL)

But S&P Dow Jones Indices also maintains an expanded list of 119 High Yield Dividend Aristocrats (1083:XX:SPHYDA) , which is tracked by the SPDR S&P Dividend ETF (PSE:SDY) . These are companies included in the S&P 1500 Composite Index (made up of the S&P 500, the S&P 400 Mid-Cap Index (S&P:MID)  and the S&P Small-Cap 600 Index (S&P:SML) ) that have increased their regular dividends for at least 20 straight years.

Despite the name, it makes no difference how high a company’s yield is when it is included in the High Yield Dividend Aristocrats Index.  

Getting back to focusing on companies with “moderate” payouts, we are paring the High Yield Dividends Aristocrats to a list of 25 with minimum dividend yields of 2% that have had the highest average returns on invested capital (ROIC) over the past 20 reported quarters through Feb. 19. Here’s the list, sorted by ROIC:

Company Ticker Industry Average ROIC - five years Dividend yield
Colgate-Palmolive Co. (NYS:CL) Household/Personal Care 33.41% 2.26%
Clorox Co. (NYS:CLX) Household/Personal Care 32.14% 2.57%
Automatic Data Processing Inc. (NAS:ADP) Data Processing Services 28.67% 2.02%
C.H. Robinson Worldwide Inc. (NAS:CHRW) Air Freight/Couriers 27.17% 2.82%
T. Rowe Price Group (NAS:TROW) Investment Managers 26.85% 2.61%
Kimberly-Clark Corp. (NYS:KMB) Household/Personal Care 25.67% 2.98%
Fastenal Co. (NAS:FAST) Wholesale Distributors 25.44% 2.61%
3M Co. (NYS:MMM) Industrial Conglomerates 22.08% 3.70%
Polaris Inc. (NYS:PII) Recreational Products 19.82% 2.64%
International Business Machines Corp. (NYS:IBM) Information Technology Services 19.49% 4.29%
McDonald's Corp. (NYS:MCD) Restaurants 18.76% 2.31%
Illinois Tool Works Inc. (NYS:ITW) Industrial Machinery 18.50% 2.30%
General Dynamics Corp. (NYS:GD) Aerospace & Defense 18.33% 2.17%
A. O. Smith Corp. (NYS:AOS) Building Products 17.82% 2.18%
PepsiCo Inc. (NAS:PEP) Beverages: Non-Alcoholic 16.95% 2.62%
Eaton Vance Corp. (NYS:EV) Investment Managers 16.92% 2.98%
Emerson Electric Co. (NYS:EMR) Electrical Products 16.87% 2.80%
Genuine Parts Co. (NYS:GPC) Wholesale Distributors 16.51% 3.27%
V.F. Corp. (NYS:VFC) Apparel/Footwear 16.17% 2.32%
AbbVie Inc. (NYS:ABBV) Pharmaceuticals 15.91% 5.04%
Lincoln Electric Holdings Inc. (NAS:LECO) Industrial Machinery 15.62% 2.15%
Johnson & Johnson (NYS:JNJ) Pharmaceuticals 13.95% 2.55%
Leggett & Platt Inc. (NYS:LEG) Home Furnishings 13.62% 3.55%
Target Corp. (NYS:TGT) Specialty Stores 11.89% 2.24%
Aflac Inc. (NYS:AFL) Life/Health Insurance 11.86% 2.16%
Source: FactSet

You can click on the tickers for more about each company.

A company’s ROIC is its after-tax profit divided by the total of its debt and equity. It provides an indication of how good a management team is at deploying money to expand, improve products and services, expand distribution and sales methods, etc.

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