(Published Dec. 14 by Bob Ciura)
The Dividend Achievers are a group of companies that have raised their dividends for at least 10 consecutive years.
You can see the entire list of all 273 Dividend Achievers here.
This list is a great source of dividend stocks that have a mix of high dividend yields and long track records of dividend growth.
Among the Dividend Achievers, there are some that stand out from the rest.
Without further ado, here are my top 10 favorite Dividend Achievers.
10. Consolidated Edison
To kick off this top 10 list, I’ve chosen utility giant Consolidated Edison (ED, Financial). There are several utility stocks on the Dividend Achievers list. What separates ConEd from the pack is that it is the only utility stock to also be on the Dividend Aristocrats list.
The Dividend Aristocrats are stocks in the Standard & Poor's 500 Index that have raised their dividends for at least the past 25 years.
You can see the entire list of Dividend Aristocrats here.
For its part, ConEd has lifted its dividend for 42 years in a row.
Source: November Company Update presentation, page 20
ConEd has a clear dividend policy. It seeks to distribute 60% to 70% of its annual adjusted earnings per share. This provides investors with the context to reasonably expect how much the dividend will be raised each year.
The company provides electricity service to approximately 3.3 million customers and gas service to approximately 1.1 million customers, primarily in New York City.
It operates in three core segments, which are:
- Consolidated Edison Co. of New York.
- Orange and Rockland Utility.
- ConEd Competitive Energy Business.
The vast majority of ConEd’s operations are in regulated markets.
Source: November Company Update presentation, page 1
Regulated markets tend to be more stable than competitive markets. This leads to modest revenue growth each year from regular rate increase approvals.
ConEd’s earnings per share rose 5% in 2015 to $4.08. Growth was due mostly to rate hike approvals, customer additions and growth in its gas delivery operation.
Analysts expect ConEd’s earnings per share to decline slightly in 2016 to $3.95 before recovering next year to $4.15.
Utility stocks are a natural fit for income investors. ConEd’s current annual payout of $2.68 per share is easily covered by earnings per share. ConEd should have little trouble continuing to grow the dividend in the years ahead.
9. Clorox
Clorox (CLX, Financial) stock has trounced its peer group over the past five years. In that time, Clorox shares have appreciated 80% while close rivals Colgate-Palmolive (CL, Financial) and Procter & Gamble (PG, Financial) are up 49% and 31%.
The main reason Clorox has outperformed the industry giants is because it is nimbler than its larger competitors. Clorox has a $15 billion market cap. It is a much smaller company than Procter & Gamble and Colgate-Palmolive.
Procter & Gamble has a $229 billion market cap. Colgate-Palmolive’s market cap is $60 billion.
While Procter & Gamble and Colgate-Palmolive resemble conglomerates in the consumer goods industry, Clorox has a much more streamlined business model. It has just three core domestic operating segments, and the company only pursues a product category if it can capture a leadership position.
Source: Barclays Global Consumer Conference, page 4
This strategy of maximizing the potential of a small number of brands has worked well for Clorox. In fiscal 2016, sales excluding currency impacts rose 5%. Earnings per share increased 8%.
The company expects fiscal 2017 sales to increase another 4% to 6%.
At the heart of Clorox’s brand strategy is to focus on what it calls consumer "megatrends." These are:
- Health & Wellness.
- Sustainability.
- Fragmentation.
- Affordability.
In essence, Clorox is anticipating the changes taking place in consumer preferences. One of these is health and wellness, where Clorox made a big push by acquiring Renew Life.
Source:Ă‚ Barclays Global Consumer Conference, page 21
Clorox also acquired Burt’s Bees, which is helping the company gain traction in new channels. Burt’s Bees wellness products are sold in traditional retailers as well as nontraditional outlets, such as clothing stores.
For example, Burt’s Bees products are sold at Old Navy. These nontraditional channels have added $10 million in annual sales growth to the company.
Clorox’s strategy should continue to fuel growth, which means the dividend is likely to grow as well.
Clorox is a Dividend Achiever as well as a Dividend Aristocrat and has hiked its shareholder payout every year since 1977.
8. PepsiCo
PepsiCo (PEP, Financial) is a global food and beverage giant. It is also a Dividend Aristocrat. It has raised its dividend for 44 years in a row. It gets the nod here because of its diversified business model.
PepsiCo has a huge portfolio of popular brands. Its major beverage brands include Pepsi, Mountain Dew and Gatorade while its food brands include Frito-Lay and Quaker.
It has 22 brands that each generate at least $1 billion in annual sales.
With such strong brands, PepsiCo commands pricing power. Its global scale provides healthy profit margins and returns on capital each year.
Source: 2016 Consumer Analyst Group of New York presentation, page 3
The company’s annual revenue is nearly split 50-50 between food and beverages. This is a key advantage for PepsiCo over other soft drink companies because soda consumption is declining.
For example, soda consumption in the U.S. has fallen each year for more than a decade and is at a 30-year low.
This is why PepsiCo’s diversification into food, and particularly healthier products, is critical to the company’s chances of growing future earnings and dividends.
PepsiCo has created a new product segment labeled “Good for You,” which includes several brands that cater to the more health-conscious consumer.
Source: Company website
Another important growth catalyst for PepsiCo moving forward will be growth in new geographic territories.
PepsiCo has a significant international presence, particularly in higher-growth markets. Approximately 31% of PepsiCo’s 2015 revenue came from developing and emerging markets such as Russia and Mexico.
In 2015, PepsiCo’s international revenue, adjusting for currency impacts, rose 8%.
Analysts on average expect PepsiCo to increase earnings per share by 3% this year and by 6.3% in 2017. This would be enough to continue raising the dividend.
PepsiCo has a current dividend yield of approximately 3%. This exceeds the 2% average yield of the S&P 500 Index.
7. Texas Instruments
Texas Instruments (TXN, Financial) stock is a bit of a hidden gem. It gets dwarfed by many larger tech companies in the financial media.
But it is a very impressive dividend growth stock. It has increased its dividend for 13 years in a row. Earlier this year, it gave investors a 32% dividend increase.
It can do this because of its high free cash flow and shareholder-friendly management. Texas Instruments is committed to returning 100% of annual free cash flow to shareholders through dividends and share repurchases.
Source: Company Web site
Over the trailing four fiscal quarters, Texas Instruments generated $3.9 billion of free cash flow. This was an 8% increase from the preceding four quarters.
The company has performed well over the course of 2016 as well. Last quarter revenue and earnings per share increased 7% and 24%.
Both of the company’s operating segments posted growth. Revenue in analog increased 6% while embedded processing revenue increased 10%. Profit margin expanded in both businesses.
Such a high level of free cash flow allows the company to allocate capital not just in dividends but across the business. It has billions to invest each year in growth-oriented R&D, capital expenditures and acquisitions.
Source: Capital management strategy, page 10
In addition, the company’s dividend growth is fueled by its unique financial position. Approximately 80% of Texas Instruments’ $3.1 billion in cash on hand is held in the U.S.
This means the company can use its cash to grow shareholder dividends. Other companies with lots of cash parked overseas do not have this ability.
Texas Instruments has a 2.2% current dividend yield which is about on par with the S&P 500. Texas Instruments is not a high-yield pick, but it offers considerable appeal as a high dividend growth stock.
6. Verizon Communications
Income investors should consider telecom stocks like Verizon Communications (VZ, Financial) because of its high dividend yield and very stable business model. In fact, Verizon is one of Warren Buffett’s highest-yielding stocks.
Verizon has a 4.5% dividend yield, which is more than double the 2% average dividend yield of the S&P 500 Index.
Verizon is an industry giant. It has a $213 billion market cap and a leading nationwide network. Its network provides the company with a high-quality customer base. This has provided Verizon with very high margins particularly on the wireless side of the business.
Source: Third Quarter Earnings presentation, page 8
Verizon Wireless represents more than 70% of the company’s total revenue. The high margins in the wireless business provide huge levels of free cash flow.
For example, last year Verizon generated $21 billion of free cash flow. This is what fuels Verizon’s hefty dividend.
The company also utilized more than $5 billion last year for share repurchases.
Going forward, Verizon has a multipronged growth strategy.
Source: Third Quarter Earnings presentation, page 13
Two compelling areas in particular are the Internet of Things as well as next-era wireless technology.
First, revenue in the Internet of Things, in which devices can communicate with each other, increased 18% in 2015.
Next, Verizon is aggressively ramping up to get ready for 5G rollout in the U.S. Approximately 97% of Verizon’s customers are on 4G. Now that this technology is saturated, 5G is the next step.
Due to surging demand for wireless data and video, Verizon plans to conduct trials of 5G wireless technology in 2016 with broader rollout set for early 2017.
According to Verizon, its investments in its network infrastructure have given it a two-year lead on its competitors. This is how Verizon retains its high brand image and is able to command pricing power.
5. Microsoft
Microsoft (MSFT, Financial) is an obvious choice among the Dividend Achievers. Investors may recall that there was a time when Microsoft stock traded for a price-earnings (P/E) ratio in the low teens because investors feared it did not have growth potential.
The prevailing sentiment was that Microsoft was “dead money” because of its exposure to the personal computer, which many analysts saw as a dying technology.
In hindsight, clearly Microsoft has had the last laugh. It successfully reduced its reliance on the PC by investing in cloud services. It now has a massive cloud platform with an impressive list of major clients.
Source: Deutsche Bank Technology Conference, page 12
Because of renewed growth from the cloud, Microsoft’s revenue increased 5% last quarter. Earnings per share rose 13% after adjusting for foreign exchange.
The biggest drivers of growth were the company’s cloud services. For example, Office 365 commercial revenue rose 60% last quarter. Azure-related revenue more than doubled during the period.
On a forward run rate basis, Microsoft now generates more than $13 billion in cloud-based service revenue.
Microsoft’s intelligent cloud business is quickly becoming the most important segment for the company due to its growth potential. Last quarter, intelligent cloud revenue increased 10% in constant currency.
Source: First Quarter Earnings presentation, page 9
Overall, the company is in tremendous financial position. It generates a huge amount of cash flow each year and has an excellent balance sheet.
The company raked in $25 billion of free cash flow in fiscal 2016. All of this cash is piling up on the balance sheet. Microsoft ended the last fiscal quarter with $137 billion of cash and marketable securities.
Microsoft recently increased its dividend by 8%, and the stock offers a solid dividend yield of 2.5%. The stock is a nice mix of an above-average current yield and dividend growth.
4. Hormel Foods
Hormel Foods (HRL, Financial) gets a high position on this list because it offers investors a mix of several great qualities. First, it has a uniquely long history of dividend growth. It has paid 353 consecutive quarterly dividends and has increased its dividend for 51 years in a row. This makes Hormel one of only 18 Dividend Kings – stocks with 50-plus consecutive years of dividend increases.
It also delivers high dividend growth rates. Hormel recently increased its dividend by 17%.
Future dividend increases should be equally impressive because Hormel has several strong brands across a diversified business model.
Hormel has a dominant grip on its core categories including Jennie-O and shelf-stable products like Spam and Hormel Chili.
These core categories are highly profitable and carry stable margins. This fuels Hormel’s dividends. In fiscal 2016, Hormel’s earnings per share of $1.64 increased 29% from the previous fiscal year. Earnings per share easily covered the company’s dividend of 58 cents per share declared during the year.
Going forward, future growth will be generated by the company’s entry into new product categories. Hormel is responding to consumers’ desire for natural and healthy foods.
Management’s broader strategy is to build its core legacy brands to maximize profitability while investing in future growth through innovation and acquisitions.
Source: Barclays Global Consumer Staples Conference, page 21
This should lead to a balanced portfolio across the spectrum of stability and growth.
Hormel has conducted several acquisitions to align itself with the health and wellness trends. For example, it acquired Applegate Farms, a leading manufacturer of natural and organic prepared meats.
Applegate Farms helped Hormel realize 8% sales growth last quarter in its core Refrigerated Foods operating segment, which represents nearly half the company’s net sales.
It also acquired CytoSport, which manufactures Muscle Milk nutritional supplements.
Source: Barclays Global Consumer Staples Conference, page 14
In fiscal 2017, Hormel management expects earnings per share of $1.68 to $1.74. After the recent increase, the forward annualized dividend is 68 cents per share.
At the midpoint of its earnings guidance, the company is projected to distribute 40% of its earnings per share in the upcoming fiscal year. This is a modest payout ratio that leaves plenty of room for continued dividend growth.
3. Abbott Labs
Abbott Labs (ABT, Financial) is a Dividend Achiever and a Dividend Aristocrat. It recently raised its dividend by 2%, marking its 45th consecutive year of dividend growth. It has paid 372 consecutive quarterly dividends, a streak that goes back 93 years.
Its long history of dividend growth can be attributed to the company’s diversified business model. Abbott is balanced across four different areas of health care:
- Nutrition (34% of total sales).
- Medical Devices (25% of total sales).
- Diagnostics (23% of total sales).
- Pharmaceuticals (18% of total sales).
The current business climate is challenged, but Abbott still performed quite well last year.
Source: Q4 2015 Earnings presentation, page 1
Sales growth is under pressure from the strong U.S. dollar. Despite this, Abbott increased currency-neutral sales by 9.1% in 2015. Earnings per share, adjusted for nonrecurring expenses, rose 9% in the same time.
It is also performing well so far this year. Over the first three quarters, currency-neutral sales rose 5.2%.
Going forward, Abbott should benefit from positive demographic changes. Specifically, the aging global population will be a long-term tailwind.
According to Abbott, the 65-and-over population will nearly triple by 2050.
An aging global population is likely to create strong demand for health care products and services. To capitalize on the demographic trends, Abbott is utilizing M&A. In 2016, it acquired St. Jude Medical for $25 billion.
Source: St. Jude Acquisition presentation, page 7
The acquisition of St. Jude significantly expands Abbott’s medical devices business. It now has a leadership position across several various product categories in a $30 billion market.
Another way in which Abbott will benefit from an aging population is it has an iron-clad grip on the adult nutrition market. Led by its Ensure brand, Abbott’s adult nutrition product sales increased 3.7% over the first three quarters.
Continued growth should lead to many more years of dividend growth for Abbott Labs.
2. Johnson & Johnson
Johnson & Johnson (JNJ, Financial) is arguably the gold standard among dividend growth stocks. It has raised its dividend for 54 consecutive years.
It would seem unnatural for a Top 10 list of the best Dividend Achievers not to include Johnson & Johnson.
It is a giant in the health care industry. It has a market cap of $315 billion and operates in more than 60 countries around the world.
Similar to Abbott, Johnson & Johnson operates in multiple segments:
- Pharmaceuticals (47% of sales).
- Medical Devices (35% of sales).
- Consumer Health Products (18% of sales).
Johnson & Johnson’s global footprint is a disadvantage for the company because of the strong U.S. dollar, but focusing on the underlying operations reveals a much better image of the company.
Sales excluding the impact of currency fluctuations rose 5.3% in 2015. Adjusted earnings per share increased 5.8%. Johnson & Johnson has grown its adjusted earnings per share each year for more than three decades.
The company is off to an equally strong start in 2016. Adjusted earnings per share increased 12.8% last quarter.
Source: Q3 Earnings presentation, page 1
The company is doing particularly well here at home. U.S. operational sales increased 6.7% last quarter, which was above the overall sales growth rate.
Among its core operating segments, Johnson & Johnson is seeing the best results in its pharmaceuticals business.
Source: Q3 Earnings presentation, page 9
Johnson & Johnson’s current annualized dividend payout of $3.20 per share represents 56% of the company’s trailing 12-month earnings per share.
In addition, Johnson & Johnson has a AAA credit rating from Standard & Poor’s.
Johnson & Johnson stock has a current dividend yield of nearly 3%. Thanks to its excellent balance sheet and potential for future growth, there should be plenty of room to keep raising the dividend for many years.
1. Cardinal Health
Taking the top spot on this list of the Best Dividend Achievers is health care distributor Cardinal Health (CAH, Financial). The reason it deserves this position is because of its high dividend growth rates, strong earnings growth and modest valuation. The company is the highest ranked Dividend Achiever using The 8 Rules of Dividend Investing.
Very few stocks have all of these qualities.
Cardinal Health is a major player in a growing market. It distributes health care products to nearly three-quarters of hospitals in the U.S. – more than 25,000 pharmacies in all.
Source: Credit Suisse Healthcare Conference presentation, page 4
Cardinal Health has increased its dividend for the past 31 years. The stock offers a nearly 3% dividend yield. Long-term investors are likely to see their yield on cost rise quickly, thanks to Cardinal Health’s rapid dividend growth.
For example, Cardinal Health’s 2016 dividend raise was a healthy 16%. This was a significantly higher dividend increase than many of Cardinal Health’s competitors in the health care sector.
The stock is also cheaper than many in its peer group. Cardinal Health shares trade for a P/E ratio of 17. Meanwhile, industry giants Johnson & Johnson and Abbott Labs have P/E ratios of 20 and 26.
Cardinal Health’s cheap valuation may be the result of negative sentiment. Investors appear concerned about the company’s growth prospects. A few years ago, Cardinal Health lost its account with Walgreens Boots Alliance (WBA, Financial).
This caused Cardinal Health’s sales to decline 10% in 2014.
However, Cardinal Health has returned to growth by investing in the business and acquiring new customers to fill the gap.
Over the past five years, the company invested $7 billion in strategic acquisitions and another $1.5 billion in R&D.
Source: Credit Suisse Healthcare Conference presentation, page 11
Thanks to Cardinal Health’s strong cash flow, it even had room to return more than $5 billion to investors in that time, through combined dividends and share repurchases.
According to the company, its adjusted earnings per share grew at a 13.4% compound annual rate over the past five years. This earnings growth fueled 14.7% compound annual dividend growth in the same period.
Because of its rare combination of an above-average dividend yield, high growth and an appealing valuation, Cardinal Health is the No. 1 Dividend Achiever.
Disclosure: I am long PepsiCo and Abbott.
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