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By Bob Ciura, suredividend.com
Income investors looking for safe, growing dividends in the stock market should focus on the highest-quality dividend growth stocks. This can seem like a daunting task, considering there are thousands of dividend stocks to choose from. But finding the best dividend stocks is actually simpler than it appears.
At Sure Dividend, we narrow down the search by focusing on stocks with long histories of raising their dividends every year. This is why we frequently write about the Dividend Aristocrats list, an exclusive group of stocks in the S&P 500 Index that have raised their dividends for 25 consecutive years.
The Dividend Aristocrats share a number of qualities that make them attractive for long-term investors. These include strong brands, competitive advantages, above-average dividend yields, and long-term dividend growth potential. In particular, the following three stocks are among the best Dividend Aristocrats today.
Dividend Aristocrat #1: Johnson & Johnson (JNJ)
Johnson & Johnson is one of our top-ranked Dividend Aristocrats because it combines a globally diversified business model, with an excellent dividend history. Johnson & Johnson is an integrated health care company, with exposure to virtually all segments of the health care industry. For example, it has a presence in medical devices, consumer health products, and pharmaceuticals.
Johnson & Johnson generated revenue of $82 billion in 2018, 51% of which was derived from outside the United States. Approximately 49% of total sales came from pharmaceuticals, while medical devices and consumer product sales accounted for 34% and 17% of revenue, respectively.
Its large and diversified portfolio has resulted in steady growth over many years. On an adjusted basis (excluding the impacts of foreign exchange rates and divestments) Johnson & Johnson grew its earnings-per-share for 35 consecutive years. Johnson & Johnson continues to grow its core business. In the most recent quarter, operational revenue increased 5.2% year-over-year, while adjusted earnings-per-share increased 3.4%. The company’s pharmaceutical segment led the way last quarter, with 6.4% growth on an adjusted basis.
Immunology sales showed the most growth, rising 9.3% for the quarter. Stelara, which treats immune-mediated inflammatory diseases, grew nearly 30% due to strong uptake for treatment of Crohn’s Disease. Oncology sales were up 6.7%, primarily because of 54% growth for Darzalex, which treats multiple myeloma.
One potential concern for Johnson & Johnson is the ongoing legal risk facing the company. Johnson & Johnson faces more than 12,000 lawsuits related its talc products. However, the impact of these cases has been muted thus far, with one case that awarded a $110 million verdict being overturned. For its part, Johnson & Johnson still expects at least 8% adjusted earnings-per-share growth for 2019, and we do not expect any damage to the company’s long-term business operations.
Johnson & Johnson has a 2.8% dividend yield, and the company has increased its dividend for 57 consecutive years.\
Dividend Aristocrat #2: AT&T Inc. (T)
AT&T ranks highly for us, due to its unique mix of a high dividend yield plus a long history of dividend growth. AT&T has increased its dividend for over 30 consecutive years. Not only that, but the stock has a dividend yield of 5.2%, making it among the highest-yielding Dividend Aristocrats. AT&T is a telecommunications giant, with a number of service offerings including wireless, broadband, and pay TV. AT&T has a market capitalization of $289 billion.
While AT&T has its roots in telecommunications, the company is expanding into content, which will fuel its growth for many years. AT&T’s massive $85 billion acquisition of Time Warner gave the company an instant foothold in content, with a number of highly popular properties. Time Warner owns the Turner networks including TBS and TNT, as well as HBO and the Warner Bros. studio.
The Time Warner acquisition is truly transformative for AT&T, as it allows the company to diversify into content at exactly the right time. As more consumers increasingly “cut the cord” by canceling their high-priced cable bundles, owning content is critical for distributors like AT&T. This strategy gives AT&T the ability to retain cord-cutters while also giving it immense advertising platforms.
Going forward, AT&T expects at least 1% revenue growth for 2020, and a similar revenue growth rate through 2022. AT&T also expects to generate adjusted earnings-per-share of at least $4.50 by 2022, which will secure the current annual dividend of $2.04 per share and simultaneously provide for dividend increases. At the same time, AT&T’s dividend safety is further secured by its debt-reduction goals. Thanks to the company’s high free cash flow generation, it expects to steadily pay off debt to reduce its net-debt-to-adjusted EBITDA ratio to a range of 2.0x to 2.25x by 2022.
AT&T is expected to maintain a dividend payout ratio below 50% for next year, which not only sufficiently covers the current payout, but also leaves room for dividend growth to continue for many years. With a current yield above 5%, AT&T is an attractive stock for risk-averse income investors.
Dividend Aristocrat #3: Walgreens Boots Alliance (WBA)
Walgreens Boots Alliance remains a top Dividend Aristocrat in our rankings, due to the company’s established presence and top brand in the United States, along with its global growth opportunities. Walgreens has experienced significant challenges in recent years, primarily the intense competition facing the retail industry from e-commerce giants such as Amazon and others. Amazon’s $1 billion purchase of online pharmacy PillPack was a clear signal of its broader ambitions in the health care space.
However, Walgreens holds a number of competitive advantages, primarily its brand recognition and physical presence which helps retain customer loyalty. Walgreens has over 18,000 stores in 11 countries around the world. In the U.S., it has thousands of stores in close proximity to customers, which is particularly important for its core pharmacy business. Unlike many other areas of retail, in which customers are more than content to order products online, pharmacy and health care products are typically sold on an as-needed basis.
Rather than wait several hours or a full day for clothing or apparel, consumers typically want pharmaceutical and health care products when they are needed. In these cases, it is much easier for a customer to make a trip to their nearby Walgreens to get what they need to feel better sooner. This simple fact has made Walgreens remarkably resilient.
In Walgreens’ recently concluded fiscal year, the company reported revenue of $137 billion, a 6% increase in constant currency. This is a very good sign, as Walgreens continues to grow revenue which indicates continued demand for Walgreens’ products and services. In the U.S., retail pharmacy sales increased 6.2% for fiscal 2019.
Walgreens reported adjusted earnings-per-share growth of just 0.5% for the year, but it did manage growth in a very difficult climate while investing heavily for future growth. Adjusted EPS of $5.99 for the full fiscal year easily covers the current dividend payout of $1.83 per share, while providing plenty of room for continued dividend increases.
Walgreens has increased its dividend for over 40 years in a row, and the stock offers an attractive yield of nearly 3%.
Final Thoughts
With interest rates on the decline, income investors are in a tough spot. Fixed income yields are falling as a result of the Federal Reserve lowering the Fed Funds rate multiple times this year. In addition, the S&P 500 Index has reached a record high, which has pushed the average dividend yield below 2%.
This all has put income investors in a difficult position. But the Dividend Aristocrats, and specifically the three mentioned above, still provide attractive dividend yields that beat the index average. Furthermore, these three stocks offer the potential for annual dividend increases for many years, even in a recession.