S&P 500 Dividend Aristocrats: Past, Present and Future

The S&P 500 Index includes some of the biggest and best known companies in the world and most pay dividends. A few years ago, S&P wanted to pull out those with the best track records for not only paying dividends, but increasing dividends over the years. They set a tough standard to filter out the best. Each company was required to have a minimum of 25 consecutive years of paying higher dividends. While the number of companies fluctuate a little from year to year, about 60 (roughly 11%) are currently S&P Dividend Aristocrats. Most have track records of 30, 40 or even 50+ consecutive years of paying higher dividends annually.

Since each company has an outstanding long term track record of paying dividends, this group can be used to obtain investment ideas. Such help is more important than ever after the pummeling virtually all stocks have taken in recent months.

However, care is always needed when selecting investments, even in this elite group, Of the seven banks in the group in 2005, only two remain. The most famous was Bank of America (BAC), which bragged in annual reports about its track record of raising dividends over the prior 30 years. Last year in Q3, instead of increasing the dividend, BAC merely mentioned declaring a regular dividend. In Q4, the dividend was cut in half. This year, on greater fears about the company and its dividend, sellers took the stock into single digits. The fears proved correct when BAC just cut their quarterly dividend to only one penny.

A few other companies have had their streak of higher dividends come to an end, but their numbers have been limited. One example, ConAgra (CAG), cut the dividend a couple of years ago. However, the stock has not sold off as badly as others in the recent market decline.

A few stocks in the group are facing difficulties. The most prominent is General Electric (GE), selling at a 15 year low. After recent problems in its businesses, especially the financial ones, General Electric has been talking about only maintaining the dividend, not increasing it. Earnings will be reported later this week. Fears of dismal earnings have caused the stock to sell off to under 14.

Pfizer (PFE) and Eli Lilly (LLY) are drug companies facing patent expiration on important drugs shortly, which could impair their ability to increase dividends. Masco (MAS) may see its 50 year track record of higher dividends come to an end in 2009 as their business selling to the housing industry is not earning the dividend. These companies have extraordinary yields of 6-9%, reflecting doubts about future.

But most companies have healthy balance sheets and good cash flows with excellent track records for increasing dividends. Just a few of the big names in the group that I like for no particular reason include:

3M (MMM)
Coca Cola (KO)
Exxon Mobil (XOM)
Johnson & Johnson (JNJ)
Kimberley-Clark (KMB)
McDonald's (MCD)
McGraw-Hill (MHP)
Procter & Gamble (PG)
Stanley Works (SWK)
VF Corp (VFC)
Walgreen (WAG)
Wal-Mart (WMT)
The recent fall in the stock market reinforces the age old advice "investigate before you invest," even for this very special group. The strong should survive and thrive over the long term. For example, I bought KO for my IRS 15 years ago. The stock has more than doubled the original price and reinvested dividends bring the total investment to almost triple. Almost 10 years ago I bought VFC which, again, has doubled the original price with reinvested dividends, bringing the total to almost triple. And today's valuations are held back because they are based on depressed market prices. Let Dividend Aristocrats provide helpful investment ideas for very smart investing.

Avi Morris

http://www.verysmartinvesting.blogspot.com/

Dividend stocks for 2009

Dividend Stocks That Shouldn't Disappoint
By J. BENNETT

Barrons
The companies on our list have a long and steady history of increasing their cash payouts to shareholders.

LAST YEAR, MANY LARGE U.S. companies had to cut or eliminate their dividends. And in 2009, the dividend news is likely to grow worse.
But income-hungry investors who prize dividend payments can still generate reliable returns from the elite among the Standard & Poor's 500 index's dividend-paying stocks.
To come up with a handful of dividend-paying stocks that we think won't let investors down, Barron's Online started with Standard & Poor's S&P 500 Dividend Aristocrats.
The 52 companies on the latest list, which came out in December, have all boosted their dividend payouts to investors for at least 25 consecutive years regardless of market conditions.
The next step was winnowing down the number of stock candidates. First we eliminated companies that aren't expected to generate profit growth in 2009. We also nixed companies with debt-to-capital ratios above 50% as well as companies that were paying out more than half of their annual earnings in dividends.
(A company with too high a dividend-payout ratio has less of an ability to protect its dividend in the event of an earnings downturn.)
We then looked for stocks with growing dividends, and yields above the 1.6% paid by 10-year inflation-protected Treasuries.
Among the stocks left standing were McDonald's (ticker: MCD), Procter & Gamble (PG), Wal-Mart Stores (WMT), Becton Dickinson (BDX) and Aflac (AFL).
These companies have some of the fastest-growing profits and dividends among large-cap stocks.
"In this environment, anyone raising their dividend stands out," says Richard Helm, a manager of the Cohen & Steers Dividend Value Fund. "What better way to show confidence in your business."
Confidence, however, has been waning, and for good reasons.
In 2008, dividend payments by companies in the S&P 500 rose by a mere 2.4%, the worse performance since 2001, when the dividends payout fell 3.3%.
And in 2009, dividends could fall even more than that as the economic recession deepens.
Investment pros suggest avoiding some classic high-yield stocks (see Weekday Trader, "In Dividends We Trust," Sept. 16, 2008).
Falling stock prices will create handsome yields that offer little comfort if the stock price keeps falling or if financial problems force the company to cut its dividend.
Last year, 48 members of the S&P 500 -- including American International Group (AIG), Whole Foods Market (WFMI), Citigroup (C) and the now bankrupt Lehman Bros. -- cut or suspended their dividends, sucking $40.6 billion from investors' pockets, according to Howard Silverblatt, senior index analyst with S&P.
Most of those announcements came from financial firms.
But the pain is spreading beyond financial firms.
To avoid getting blindsided, investors have to "check under the hood," says Judith Saryan, a portfolio manager with Eaton Vance Managed Investments.
Focus on companies with rising profits and enough free cash flow to fund the dividend payment.
Among our recommended five companies, the biggest one was Wal-Mart. While it has a modest yield of 1.8%, it has raised its dividend an average of 18% annually over the last five years.
In a down year for stocks, Wal-Mart shares gained almost 18% in 2008 as Americans flocked to discount stores. Meanwhile, fewer new-store openings and capital-spending cuts have strengthened free cash flow.
The dividend could climb 8% during the next fiscal year, which begins on Feb. 2.
Other company picks are increasing their dividends even faster.
With a yield of 3.4%, fast-food giant McDonald's could increase its payout to investors by almost 27% in 2009 to $2.12 a share.
Six years into a rebound spawned by new foods and less aggressive expansion, the company's popular "Dollar Menu" has lured cash-strapped diners.
Meanwhile, the timing of their last quarterly dividend hike -- a 33% increase on Sept. 25 -- denotes considerable confidence, says Chris Hagedorn, a portfolio manager with the Fifth Third Dividend Growth Fund.
The same can be said for medical-supply company Becton Dickinson, and life insurer Aflac. Both companies raised dividends last quarter.
"If raising the dividend is normally a strong sign of management's faith in the future, then in this environment it's even more so," Hagedorn adds.
Becton's profits are expected to climb an average of 12% annually over the next five years (see Weekday Trader, "Becton Dickinson Is a Safe Bet," July 18, 2008). And during the fiscal year scheduled to end on Sept. 30, 2009, the annual payout could climb 14% to $1.31 a share.
Aflac, meanwhile, has raised its dividend an average of 27% annually over the last five years (see Barron's, "Ducky Doings at Aflac," Feb. 4, 2008).
With a yield of 2.8%, the company's payout still consumes only one-quarter of profits, which are expected to climb 15% annually over the next five years, according to Thomson Reuters.
Other names, however, have had a harder time, recently.
At consumer-products titan Procter & Gamble, earnings estimates have come into doubt. Last month, the company -- which has raised its dividend for 52 consecutive years (see Barron's, "Procter & Gamble Pampers Investors," April 14, 2008) -- warned that organic sales growth fell short during the quarter that ended on Dec. 31.
P&G still expects to earn between $4.28 a share and $4.38 a share during the fiscal year scheduled to end on June 30, a 17.6% to 20% gain.
Wall Street expects the dividend to climb 12%.
Of course, just because a company has a long history of increasing dividends does not mean that payments will keep rising, or survive.
If the recession deepens, then all bets may be off. For now, corporate boards may delay dividend hikes until they have a clearer picture of policies coming out of Washington.
Yet after 25 years or more, old habits die hard.
So investors should still be able to bank on dividends from the few companies that haven't let us down a year into a recession.