Many investors are looking for ways to generate reliable income streams from their investments, with retirement being the most prominent motivation for seeking reliable income generation.
Some of the most attractive dividend growth stocks are the Dividend Aristocrats, a group of stocks that have raised their dividends for at least 25 years in a row.
A growth track record this long is only possible when companies have healthy balance sheets, reliable business models, and when recessions that occur from time to time do not hurt them too much.
For income investors, dividend-paying equities are thus among the best investment choices available. When one chooses strong companies to invest in, the risk of a dividend cut is low.
At Sure Dividend, our approach is to identify high-quality dividend growth stocks that have competitive advantages and a compelling long-term outlook.
When bought at the right price, these stocks tend to do very well in a buy-and-hold portfolio, providing both a growing income stream and capital appreciation on top of that.
Some of the factors we focus on when looking for quality buy-and-hold dividend growth stocks are their moats, their dividend growth track records, their past recession performance, and last but not least, their dividend yield and valuation.
In this report, we’ll highlight three quality Dividend Aristocrats that make for compelling buy-and-hold investments.
1: Johnson & Johnson
Johnson & Johnson (JNJ) is a diversified healthcare company that is active in pharmaceuticals, medical tech, and consumer goods (e.g. skincare, over-the-counter health products). Johnson & Johnson is valued at more than $450 billion and has raised its dividend for 59 years in a row.
Johnson and Johnson has one of the longest streaks of annual dividend increases in the entire stock market. It qualifies as a Dividend Kings.
Johnson & Johnson also is one of just two companies in the world with a triple-A rating. This is made possible by its very strong balance sheet and by the fact that its diversified operations are extremely resilient versus external shocks such as recessions. Even during the pandemic, Johnson & Johnson did not feel much of an impact. In 2020, earnings-per-share declined by just a couple of percent, while earnings-per-share in 2021 set a new record high, around 15% above pre-crisis levels.
Johnson & Johnson benefits from macro trends such as growing healthcare spending due to aging populations, and from improving healthcare access in many emerging markets. At the same time, JNJ’s already large size means that the relative growth rate is not extremely high, however.
Based on JNJ’s historic growth, we believe that a 6% earnings-per-share growth rate is realistic in the long run, stemming from a combination of organic business growth, acquisitions, and share repurchases. This, combined with a dividend yield of 2.5%, should allow for compelling returns from this ultra-low-risk stock in the long run.
2: Procter & Gamble
Procter & Gamble (PG) is one of the largest consumer packaged goods companies in the world. Its vast and diversified product portfolio includes categories such as beauty, grooming, healthcare, baby care, and more. Important brands include Head and Shoulders, Olay, Old Spice, etc. Procter & Gamble has a market capitalization of $370 billion and has raised its dividend for an incredible 65 years in a row.
Demand for Procter & Gamble’s products is not cyclical, as consumers still buy them even during recessions or other crises, which is why Procter & Gamble is very resilient versus all kinds of macro shocks. This includes the current pandemic, as Procter & Gamble has managed to grow its earnings-per-share in both 2020 and 2021, hitting new record highs in both years.
With its vast and diversified product portfolio, maintaining a very steep relative growth rate is not possible. That being said, the company has nevertheless delivered reliable earnings-per-share growth in the past and should do so in the future, too. We forecast an earnings-per-share growth rate in the mid-single digits, being fueled by organic growth, international expansion, and share repurchases.
Procter & Gamble’s dividend yield of 2.3% is not ultra-high. But investors get a very safe, resilient company that will likely perform well, no matter what. With its dividend growth track record of more than six decades, ongoing income growth is extremely likely. As a low-risk pick for a conservative income investor, Procter & Gamble is a strong pick.
3: 3M Company
3M Company (MMM) is a diversified industrial company that manufactures and sells tens of thousands of products used at home, in hospitals, in offices, in construction, and so on. Surgical products, industrial tapes and abrasives, and protection equipment are just some of the areas 3M is active in.
The company is the smallest among the three in this article in terms of market capitalization, but with an equity value of $85 billion 3M is still far from small in absolute terms. The company has a 63-year dividend growth track record, showcasing its strong execution and below-average risk profile over the last couple of decades.
Some of 3M’s end markets can be cyclical, but due to strong diversification across many different types of products, the company has nevertheless done well even during recessions and also during the current pandemic. In 2020, earnings-per-share dropped by a couple of percentage points, but they recovered above 2019’s level of profitability in 2021.
Recent lawsuits regarding some of 3M’s products, such as purportedly faulty earplugs, have hurt 3M’s share price. But thanks to a solid balance sheet and strong cash flows, 3M should not run into too much trouble even if it has to make payments due to these lawsuits. In the long run, organic business expansion, inorganic growth, and share repurchases should allow 3M to grow its earnings-per-share at a mid-single digits rate, we believe.
Between this expected growth, an attractive dividend yield of 4% with a dividend payout ratio in the high 50s, and some multiple expansion potential, we expect that 3M will deliver double-digit annual returns in the coming years.
About the authors:
This is a guest post by author Jonathan Weber for Sure Dividend. The fellows from Sure Dividend asked me if they could publish a guest post on the TEV Blog. Sure Dividend featuring my blog? Sure thing!