If you are looking for investment income, times are tough. Interest rates remain very low and long-term rates fell significantly after the Federal Reserve signaled it won’t raise rates anymore this year. But if you want to build an income source, holding the right stocks for the long term can pay off tremendously.
McDonald’s MCD, -0.58% is an excellent example. Investors now receive a quarterly dividend of $1.16 a share, which translates to a yield of 2.48%, based on the closing price of $186.81 on March 22. That yield may not be very impressive, but it exceeds the yield of 2.43% on 10-year U.S. Treasury Notes TMUBMUSD10Y, -1.78% And owners of McDonald’s expect the share price to rise over time and for the dividend to keep increasing.
If you had purchased McDonald’s stock five years ago, at the market close on March 25, 2014, you would have paid $95.91 a share. The quarterly dividend at that time was 81 cents, for a yield of 3.38%. If you had not reinvested the dividends (which makes the math a lot easier), the yield on the shares you bought in March 2014 would now be 4.84%. That is quite an increase in income, not to mention the near doubling of the share price.
Last week, Bill McMahon, the chief investment officer of ThomasPartners (a unit of Charles Schwab), discussed with MarketWatch the importance of steady and significant increases in dividends, especially when Federal Reserve policy is so clearly designed to hold long-term interest rates down.
With that in mind, a look at recent history for the S&P 500 Dividend Aristocrats sheds light on 20 companies whose most recent dividend increases have been 10% (rounding up) or more.
The S&P 500 Dividend Aristocrats Index SPDAUDP, +0.13% is made up of the 57 companies in the S&P 500 SPX, -0.08% that have increased their regular dividend payouts for at least 25 consecutive years. That is the only requirement — it makes no difference how high a stock’s current dividend yield is. The idea is that management teams that continue to reward shareholders are likely to show better stock performance over the long term. The ProShares S&P 500 Dividend Aristocrats Index NOBL, +0.09% is a way to “play” the Dividend Aristocrats Index as a growth investment.
Getting back to income, here are the 20 S&P 500 Dividend Aristocrats whose most recent increase in regular payouts have been the highest:
| Dividend Aristocrat | Ticker | Most recent dividend increase | Previous dividend increase | Current dividend yield |
| Sherwin-Williams Co. | SHW, +0.40% | 31.4% | 1.2% | 1.07% |
| Illinois Tool Works Inc. | ITW, +0.28% | 28.2% | 20.0% | 2.82% |
| Cintas Corp. | CTAS, +1.27% | 26.7% | 24.0% | 1.05% |
| A. O. Smith Corp. | AOS, -0.12% | 22.2% | 28.6% | 1.70% |
| Lowe's Companies Inc. | LOW, +1.03% | 17.1% | 17.1% | 1.83% |
| McDonald's Corp. | MCD, -0.58% | 14.9% | 7.4% | 2.48% |
| Automatic Data Processing Inc. | ADP, -0.04% | 14.5% | 10.5% | 2.05% |
| Clorox Co. | CLX, +0.01% | 14.3% | 5.0% | 2.43% |
| Abbott Laboratories | ABT, +0.33% | 14.3% | 5.7% | 1.64% |
| S&P Global Inc. | SPGI, -0.23% | 14.0% | 22.0% | 1.11% |
| Franklin Resources Inc. | BEN, -0.56% | 13.0% | 15.0% | 3.24% |
| Ecolab Inc. | ECL, +0.41% | 12.2% | 10.8% | 1.06% |
| Roper Technologies Inc. | ROP, +0.46% | 12.1% | 17.9% | 0.56% |
| Hormel Foods Corp. | HRL, +1.10% | 12.0% | 10.3% | 1.93% |
| AbbVie Inc. | ABBV, -0.31% | 11.5% | 35.0% | 5.37% |
| V.F. Corp. | VFC, +0.94% | 10.9% | 9.5% | 2.44% |
| Caterpillar Inc. | CAT, +1.24% | 10.3% | 1.3% | 2.65% |
| Walgreens Boots Alliance Inc. | WBA, -1.15% | 10.0% | 6.7% | 2.82% |
| General Dynamics Corp. | GD, +0.46% | 9.7% | 10.5% | 2.46% |
| McCormick & Co., Incorporated | MKC, +1.10% | 9.6% | 10.6% | 1.60% |
| Source: FactSet | ||||
You can click the tickers for more about each company.
Here’s a quick summary of sell-side (brokerage firms) analysts’ opinions about these stocks:
| Dividend Aristocrat | Ticker | Share 'buy' ratings | Share neutral ratings | Share 'sell' ratings | Closing price — March 22 | Consensus price target | Implied 12-month upside or downside potential |
| Sherwin-Williams Co. | SHW, +0.40% | 62% | 35% | 3% | $420.72 | $458.25 | 9% |
| Illinois Tool Works Inc. | ITW, +0.28% | 13% | 61% | 26% | $141.65 | $135.83 | -4% |
| Cintas Corp. | CTAS, +1.27% | 41% | 47% | 12% | $194.55 | $212.00 | 9% |
| A. O. Smith Corp. | AOS, -0.12% | 54% | 38% | 8% | $51.74 | $56.13 | 8% |
| Lowe's Companies Inc. | LOW, +1.03% | 69% | 31% | 0% | $104.95 | $116.93 | 11% |
| McDonald's Corp. | MCD, -0.58% | 80% | 20% | 0% | $186.81 | $197.80 | 6% |
| Automatic Data Processing Inc. | ADP, -0.04% | 36% | 59% | 5% | $153.81 | $159.06 | 3% |
| Clorox Co. | CLX, +0.01% | 16% | 58% | 26% | $158.13 | $153.50 | -3% |
| Abbott Laboratories | ABT, +0.33% | 83% | 9% | 8% | $77.97 | $80.76 | 4% |
| S&P Global Inc. | SPGI, -0.23% | 53% | 41% | 6% | $205.49 | $210.38 | 2% |
| Franklin Resources Inc. | BEN, -0.56% | 0% | 47% | 53% | $32.10 | $28.54 | -11% |
| Ecolab Inc. | ECL, +0.41% | 37% | 50% | 13% | $173.38 | $170.12 | -2% |
| Roper Technologies Inc. | ROP, +0.46% | 60% | 33% | 7% | $329.47 | $325.50 | -1% |
| Hormel Foods Corp. | HRL, +1.10% | 7% | 66% | 27% | $43.59 | $40.33 | -7% |
| AbbVie Inc. | ABBV, -0.31% | 31% | 53% | 16% | $79.76 | $90.13 | 13% |
| V.F. Corp. | VFC, +0.94% | 72% | 24% | 4% | $83.72 | $95.29 | 14% |
| Caterpillar Inc. | CAT, +1.24% | 58% | 34% | 8% | $129.77 | $151.19 | 17% |
| Walgreens Boots Alliance Inc. | WBA, -1.15% | 30% | 59% | 11% | $62.41 | $74.52 | 19% |
| General Dynamics Corp. | GD, +0.46% | 48% | 43% | 9% | $165.85 | $199.45 | 20% |
| McCormick & Co., Incorporated | MKC, +1.10% | 15% | 77% | 8% | $142.37 | $132.27 | -7% |
| Source: FactSet | |||||||
So only nine of these companies have majority “buy” or equivalent ratings from analysts right now. Then again, it is very important to keep in mind that the ratings are based on 12-month price targets. One year is a short period for a serious long-term investor, especially one who is looking for dividend yields to increase considerably over a period of many years. But it still signals a disconnect between how the company sees its prospects compared to how brokerage firms’ analysts judge it.
Getting back to our five-year McDonald’s example, way back on March 25, 2014, only 12 out of 27 analysts polled at that time by FactSet had “buy” or equivalent ratings on the stock, while the rest had neutral ratings. The consensus price target then was $103.52, which implied 12-month upside potential of “only” 8% for the shares. Actually, that wasn’t bad, considering the current yield at that time was 3.38%.
So if you are interested in any of these 20 companies as long-term income growers, your next step is to do your own research and form you own opinion about how well a company’s strategy will enable it to compete and prosper over the next decade at least.
Better growth over the very long haul
The ProShares S&P 500 Dividend Aristocrats Index NOBL, +0.09% was established in 2013, so there isn’t a very long track record to compare its performance against that of ETFs that track the S&P 500. For five years through March 22, NOBL returned 66.5%, compared to 66.2% for the Vanguard S&P 500 ETF VOO, -0.09% and 65.6% for the SPDR S&P 500 ETF Trust SPY, -0.08%
That is a fair comparison, because all three ETFs have expenses, however low, and it is clear that the Aristocrats fared best, but not by much.
If we leave the ETFs behind and look at the indexes for longer periods, it is clear that the Dividend Aristocrats have been an impressive group.
Here’s a comparison of 10-year returns for the S&P 500 Dividend Aristocrats Index and the S&P 500:
What you don’t see in the 10-year chart is the brutal market decline during the financial crisis of 2008, after which the S&P 500 bottomed on March 9, 2009. So the 15-year chart gives a clearer view of the Aristocrats’ outperformance:
Other Deep Dive coverage of dividend stocks:
• Federal Reserve policy makes this dividend-stock strategy even more important
• 20 dividend stocks with ‘headroom’ to pay investors even more
• 9 stocks with dividend yields over 4% in a sector that often beats the broader market
Create an email alert for Philip van Doorn’s Deep Dive columns here.