Dividend Aristocrats with 10%+ Dividend Growth

dividend aristocratsThis is a guest contribution by Ben Reynolds.  Ben runs Sure Dividend, which uses The 8 Rules of Dividend Investing to help investors systematically build high quality dividend growth portfolios.

The US Dividend Aristocrats Index is comprised of many of the highest quality businesses around.  The requirements to be a Dividend Aristocrat are below:

  • Be in the S&P 500
  • 25+ Years of consecutive dividend increases
  • Meet certain minimum size and liquidity requirements

Currently, just 50 stocks qualify under these requirements.  You can see all S&P500 Dividend Aristocrats here.

Think about what it takes to pay rising dividends every year for 25 or more consecutive years.  For a business to do this, it must have a sustainable competitive advantage.

Of course, things change over time.  Sometimes businesses are able to reinforce their competitive advantage.  Competitive advantages are often called ‘moats’ because they protect a business from competition (like protecting a castle from enemies).

An improving competitive advantage is like dredging the moat deeper – or adding alligators.  Alternatively, a business’ competitive advantage can weaken.

This is usually accompanied by slower dividend growth.  This article lists the 23 Dividend Aristocrats that have grown dividend payments at 10% a year or more over the last decade (from 2005 though 2015).  It also discusses why historical dividend growth is important (and when it isn’t).

10% is chosen as a cut off somewhat arbitrarily.  It is a nice round number.  10% growth is also well in excess of what one can expect from the market on average.  These are stocks that exhibit superior growth.

When you combine growth, quality, and dividends, you have a powerful combination.

Full List of 10%+ Dividend Growth Dividend Aristocrats

All 23 Dividend Aristocrats with 10%+ dividend growth over the last decade are shown below, along with dividend compound annual growth rate.  They are listed in order, with the fastest dividend grower ranked first.

  1. Lowe’s (LOW) – 25.5% Dividend CAGR
  2. Cardinal Health (CAH) – 25.1% Dividend CAGR
  3. Walgreens (WBA) – 20.1% Dividend CAGR
  4. Target (TGT) – 19.0% Dividend CAGR
  5. McDonald’s (MCD) – 17.8% Dividend CAGR
  6. W. Grainger (GWW) – 17.4% Dividend CAGR
  7. F. Corporation (VFC) – 16.9% Dividend CAGR
  8. Franklin Resources (BEN) – 15.9% Dividend CAGR
  9. Rowe Price Group (TROW) – 15.6% Dividend CAGR
  10. Medtronic (MDT) – 15.5% Dividend CAGR
  11. Hormel Foods (HRL) – 14.4% Dividend CAGR
  12. Ecolab (ECL) – 14.4% Dividend CAGR
  13. Aflac (AFL) – 13.6% Dividend CAGR
  14. Archer-Daniels-Midland (ADM) – 13.3% Dividend CAGR
  15. Illinois Tool Works (ITW) – 13.0% Dividend CAGR
  16. Becton, Dickinson, & Company (BDX) – 12.8% Dividend CAGR
  17. Sherwin Williams (SHW) – 12.6% Dividend CAGR
  18. Wal-Mart (WMT) – 12.6% Dividend CAGR
  19. Automatic Data Processing (ADP) – 12.3% Dividend CAGR
  20. PepsiCo (PEP) – 10.7% Dividend CAGR
  21. Clorox (CLX) – 10.5% Dividend CAGR
  22. Colgate-Palmolive (CL) – 10.4% Dividend CAGR
  23. Cintas (CTAS) – 10.3% Dividend CAGR

Important Caveat

The dividend growth results above should not be used to predict future dividend growth.  Some of the growth rates above are a result of significantly increasing a company’s payout ratio.  This is unsustainable.

We will use McDonald’s as an example.  The company has compounded dividends at the blistering pace of 17.8% a year from 2005 through 2015.  Dividends increased from $0.67 a share to $3.44 a share.  Earnings-per-share grew from $1.97 to $4.97 – solid growth – but not nearly as fast as dividends.

The only way for dividends to grow faster than earnings-per-share is for the payout ratio to increase.  In McDonald’s case, the payout ratio increased from 34% to 69%, slightly more than doubling.

There’s no way McDonald’s can double its payout ratio again over the next decade.  If it did, the payout ratio would be 138%; significantly over earnings-per-share!  Obviously, that’s unsustainable.

It’s likely McDonald’s maintains its current ~70% payout ratio.  This means dividends will grow in line with earnings-per-share going forward, not faster.

That’s the big flaw of using historical dividend growth rates to predict future dividend growth rates; rising payout ratios are not sustainable.

What Historical Dividend Growth Shows

With that said, analyzing historical dividend growth is still valuable.  Fast dividend growth is typically a combination of:

  1. A growing business
  2. A shareholder-friendly management

In McDonald’s case, management decided to significantly increase the payout ratio.  Yes, the payout ratio can’t rise forever, but this also shows that the company’s management is committed to rewarding shareholders with dividends.  That’s a positive sign.

Management that look to ‘build an empire’ to command a higher salary will keep payout ratios low (or not pay any dividends).  Instead, the cash is used to make acquisitions and fund growth – at any price.  This can be destructive to shareholder value.

On the other hand, paying dividends is virtually never destructive to shareholder value.  More money in your pocket isn’t a bad thing.

Final Thoughts

The Dividend Aristocrats Index is filled with many of the best businesses around.  Looking at the fastest growing dividend payers in the Dividend Aristocrats shows the ‘best of the best’.

Investors shouldn’t use historical dividend growth to predict future returns.  But looking at quickly growing dividend stocks with long dividend histories is an excellent ‘shortcut’ to finding high quality shareholder friendly businesses.

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