3 Dividend Aristocrats Providing Safe and Reliable Income

A look at companies with at least 25 years of dividend growth offering yields that are at least twice that of the S&P 500

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Nathan Parsh
Mar 25, 2021
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The Dividend Aristocrats are those companies in the S&P 500 that have increased dividend distributions for at least 25 years. This is a select group of names as there are less than 70 companies that qualify. Providing a growing dividend for at least a quarter of century is not easy, but the companies discussed here have accomplished this task.

We will examine three Dividend Aristocrats that are currently yielding twice the average yield of the S&P 500.

3M

3M Co. (

MMM, Financial) provides products that are used in office buildings, homes and hospitals, among others, in more than 200 countries around the world. The company has four business segments, including Safety & Industrial, Healthcare, Transportation & Electronics and Consumer. 3M has a market capitalization approaching $110 billion and generated revenue in excess of $32 billion in 2020.

The company has raised its dividend for 63 consecutive years, giving it one of the longest dividend growth streaks in all of the market. 3M's dividend had a compound annual growth rate of more than 10% between 2011 and 2020. Most recently, 3M raised its dividend 0.7% for the March 12 payment date. Using the annualized dividend of $5.92 and the most recent closing price, 3M yields 3.1%, which is more than twice that of the S&P 500 Index's average yield of 1.5%. The average yield since 2011 is 2.6%.

Dividend growth has slowed severely over the past few years, but 3M's dividend doesn't appear to be in any danger of being cut. According to Wall Street analysts surveyed by Yahoo Finance, 3M is expected to earn $9.59 per share in 2021. This results in a projected payout ratio of 62%. This is above the 10-year average payout ratio of 50%, but only slightly higher a than the five-year average payout ratio of 58%.

If there is an issue with 3M, it is the stock's valuation. In late 2020, I discussed the stock's higher-than-usual dividend yield and thought that shares offered a possible double-digit return. Shares have increased almost 60% over the last year. With this increase comes a higher valuation.

Using Wednesday's closing price of $190.69 and expected earnings per share for the year, 3M has a forward price-earnings ratio of 19.9. This is higher than the stock's 10-year average price-earnings ratio of 18.4.

Shares are also trading above their intrinsic value according to GuruFocus. As a reminder, the GF Value is calculated using historical multiples, past returns and growth as well as future estimates of business performance.

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The stock's present GF Value is $179.48, resulting in a price-to-GF Value of 1.06. Shares of 3M would have to fall 6% to reach the GF Value.

3M has one of the most impressive dividend growth streaks in the market and is currently offering a yield that is 50 basis points above its 10-year average. The stock has enjoyed an excellent return over the last 12 months and is no longer inexpensive compared to its own historical valuation or its GF Value. However, I believe the six-plus decades of dividend growth is a demonstration of 3M's strength. For high-quality companies, I am comfortable with paying a premium price. I added to my position in 3M in late January and would do so again, especially on any weakness.

Essex Property Trust

Essex Property Trust Inc. (

ESS, Financial) had been in business since 1971 prior to becoming a real estate investment trust in 1994. The trust specializes in multifamily residential properties on the west coast of the U.S. The company has an ownership stake in nearly 250 apartment communities containing more than 60,000 apartment homes. The trust is worth $18.6 billion and produced revenue of nearly $1.5 billion last year.

Essex raised its dividend 0.6% for the upcoming April 15 payment date, giving the trust 27 consecutive years of dividend growth. The dividend has a compound annual growth rate of 7.2% since 2011. As with the other names on this list, Essex Property Trust's dividend growth slowed tremendously last year, but this was likely in response to the ongoing pandemic. The increase for the prior year of 6.5% was more in the vicinity of the long-term average. The stock yields 3% at the moment, matching the long-term average yield.

While lower-than-usual dividend growth can be seen as a sign of a troubled company or impending dividend cut, Essex Property Trust has a very healthy payout ratio historically, especially for a REIT. The trust is expected to produce funds from operations of $12.25 for the year. The annualized dividend stands at $8.36, giving Essex Property Trust an expected payout ratio of 68% for 2021. This compares to the 10-year average payout ratio of 62%.

Essex Property Trust has gained 52% over the last year. With shares trading at $276.29, the trust has a forward price-FFO ratio of 22.6. For comparison purposes, the stock's 10-year average price-FFO ratio is 21.1.

The stock is also trading at a small premium to its GF Value.

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The trust has a GF Value of $268.11, which equates to a price-to-GF Value of 1.03.

Essex Property Trust operates in a niche area of the REIT sector, choosing to focus its business on the west coast and in multifamily housing units. That said, Essex Property Trust does have almost three decades of dividend growth and is one of just three REITs to qualify as a Dividend Aristocrat. Investors looking for reliable income from the real estate sector could do well owning shares of Essex Property Trust.

International Business Machines

International Business Machines Corp. (

IBM, Financial) is a giant in the information technology sector. The company provides software, hardware and services to clients around the world. IBM is the largest provider of IT services in the world. The company purchased Red Hat in 2019 in an effort to gain a foothold in the cloud computing space. IBM is valued at $117 billion today and had revenue of $73.6 billion last year.

Following a 0.6% increase for the June 10, 2020 payment, IBM has now raised its dividend for 25 consecutive years, making it one of the newest members of the Dividend Aristocrats. Shareholders have seen their dividends compound at a rate of 8.4% annually over the last decade. IBM offers a high yield of 5% currently, which compares to its five- and 10-year average yields of 4.3% and 3.2%.

As with 3M and Essex Property Trust, IBM's most recent dividend increase was the bare minimum to keep its growth streak intact. This may turn out to be the prudent move as the company didn't have much clarity on how the Covid-19 pandemic would impact its business. It will be interesting to see if dividend growth accelerates if IBM sticks to its traditional schedule of raising its distribution for the June payment. The company typically announces its next dividend increase at the end of April.

On the positive side, IBM's dividend looks to be well protected. With an annualized dividend of $6.52 and expected earnings per share of $11.02 per share for this year, IBM has projected payout ratio of 59%. This is well above the 10-year average payout ratio of 39%, but closer to the five-year average payout ratio of 51%.

Shares of IBM have climbed almost 38% over the last 12 months. The stock closed yesterday's trading session at $130.62. Using analysts' earnings per share estimate for the year, IBM has a forward price-earnings ratio of 11.9. This is nearly in line with the stock's 10-year average multiple of 12.2.

IBM is trading very close to its GF Value as well.

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Shares of the company have a GF Value of $128.11, giving IBM a price-to-GF Value of 1.02.

IBM's struggles have been well documented. The company's revenue has decreased with a compound annual rate of 3.7% since 2011. Besides the 5% dividend yield, there are some potential positives working in the company's favor. Under a new CEO, IBM will undergo a transformation and split into two separate entities, one focused on hybrid cloud computing and artificial intelligence and the other focused on managed infrastructure services. This could allow IBM's more growth-oriented businesses to excel. Investors could enjoy the high dividend yield while waiting for the turnaround to be achieved.

Final thoughts

Those looking for safe and reliable income should look to those companies that have increased their dividend distributions for long periods of time. 3M, Essex Property Trust and IBM are three Dividend Aristocrats with at least a quarter century of dividend growth. Each stock also yields at least twice that of the S&P 500. Finally, each name also has a very reasonable payout ratio, making it likely that they will continue to grow dividends in the future.

Disclosure: The author has a long position in 3M Co.

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I am originally from the Detroit, Michigan area, before moving to Maryland to begin a career as an educator. This is my 15th year teaching. My wife and I have two young children who keep us on our toes.