3 Dividend Aristocrats to Buy Today

If you are looking for companies that will provide an income during retirement AND consistently give you raises then look no further than the S&P 500 dividend aristocrat list. The dividend aristocrat list represents an elite listing of companies that have consistently raised dividends for at least 25 years. Companies on the dividend aristocrat list have given an annualized return of 10.6% vs. 8.2% for the S&P 500 over the last 10 years.

However, from a business owner standpoint I offer the following criteria to help you focus on companies with staying power and a better chance to continue those dividend increases over the long-term.

1        1.) Sell a needed or highly desirable product/services--Companies that sell needed products/services or provide ease of access to highly wanted products/services will ensure the revenue and free cash flow growth needed to maintain dividend growth.

2       2.) Dividend sustainability—Look for businesses that consistently pay out a relatively low portion of yearly free cash flow in dividends for at least five years and preferably at a rate less than 50%. Measuring dividend payouts against actual cash flow generation represents the most accurate method of gauging dividend sustainability. You want companies to retain some of that cash for other things such as reinvestment back into the business, difficult times, and other forms of capital return such as share buybacks.

3       3.) Decent dividend yield—Focus on companies that provide an annual dividend yield of 1.71% or greater, which is more than most online five year CDs according to Bankrate.com. What’s the point of assuming the risk of buying stocks for income if you can get an income stream risk free? Investors need extra yield to compensate for the added risk.

Snacks and beverages

                                                                      

PepsiCo (NYSE: PEP) sells things like snacks, hot cereal, oatmeal, bottled water, juices and carbonated soda. Some of these types of products don’t exactly represent needed products and actually fall under the wanted category. However, the company’s ubiquity and global availability of products make it really easy to pick up one of its products like soda and/or snacks on the go. PepsiCo holds the No. 6 spot in the world in terms of beverage market share according to Bloomberg Industry Leaderboard. This company represents one of the global oligarchs in providing beverages and edibles.

PepsiCo’s dividend sustainability lies in the OK range with its dividend to free cash flow ratio hovering between 50% and 59% over the past five years (see table below). However, its product diversity and market dominance counterbalance this slight negative.

PepsiCo Dividend to Free Cash Flow Ratio
2009	2010	2011	2012	2013
58.5%	57.3%	56.3%	57.3%	49.8%

Source: Morningstar and author’s calculations

Currently, PepsiCo pays its shareholders $2.62 per share per year and provides a nice yield of 2.9% which just represents a starting point. PepsiCo’s market dominance and ubiquity will most likely ensure PepsiCo’s continued revenue and free cash flow growth and subsequent dividend growth.

Parts and supplies

Genuine Parts Service (NYSE: GPC) sells car parts, industrial parts, and office supplies which serve an essential function in society. People need to drive or ride a bus and both things need parts. Also, factories and mines need parts and Genuine Parts Service provides for that as well through its industrial division. In addition, people can’t function without office equipment.

Genuine Parts Service maintained a pretty sustainable dividend rate over the past five year, keeping its dividend to free cash flow payout ratio below 45% with the exception of 2011.

Genuine Parts Service Dividend to Free Cash Flow Ratio
2009	2010	2011	2012	2013
36.1%	43.5%	53.0%	37.0%	35.0%

Source: Morningstar and author’s calculation

Genuine Parts Service currently pays its shareholders $2.30 per share per year and yields 2.8%. People are keeping their cars longer which mean that the need for car parts will be sustained.

Spices and condiments

McCormick (NYSE: MKC) sells things like condiments, spices, gravy mixes, and other things mixed in or on top of foods. McCormick’s products definitely fall under the needed category. People need its products to add flavoring and texture. The company isn’t without competitors, but it is a market leader.

McCormick has paid out a reasonable amount of its free cash flow in dividends with the exception of 2011 (see table below).

McCormick Dividend to Free Cash Flow
2009	2010	2011	2012	2013
37.5%	46.3%	60.9%	47.8%	49.3%

Source: Morningstar and author’s calculations

Currently, McCormick pays its shareholders $1.48 per share per year and yields 2.2% annually. McCormick isn’t a high flying growth company but it isn’t going anywhere anytime soon.

The takeaway

The fact that these companies sell highly desirable and needed products will ensure enough revenue and free cash flow growth to serve as a solid basis for future dividend growth. Investors will also reap gains in the form of capital gains as the market adjusts the stock price to bring dividend yields to normalcy. They represent publicly traded businesses to own for the decades.

Stockdissector is NOT an investment adviser. He owns shares in PepsiCo and will not execute trades in company shares for a period of three market days.