The term “ dividend aristocrats ” was coined to describe S&P 500 stocks that had increased their payout to shareholders each year for at least 25 years. Shareholders in such firms have great confidence that their companies can provide a secure and rising income. This steadily rising payout is a sign of strong financials and, usually, of lower share-price volatility .
On the other hand, aristocrats may produce lower capital gains than growth stocks (which often pay no dividend). Investors also need to check that the company is not paying out too high a proportion of earnings as dividends, and thereby foregoing growth opportunities by reinvesting too little. In 2021 there were 65 dividend aristocrats in the S&P 500.
Over the previous decade, those stocks had produced a total annual return of 14.3% compared with 14.2% for the index. There were 66 aristocrats in 2023 and 81% of these were from five sectors: industrials (24.1% of the total), consumer staples (22.8%), materials (12.5%), financials (11%) and healthcare (10.4%).
What are dividend super aristocrats?
While dividend aristocrats boast at least 25 years of continuous dividend growth, some of them have records of over 60 years. We define a dividend super aristocrat (DSA) as a company with at least 40 years of continuous dividend growth; it need not be a member of the S&P 500.
Examples are Automatic Data Processing (ADP), Coca-Cola, Medtronic, and Halma of the UK. ADP, one of the largest business-services outsourcers, has a record of 49 years of continuous dividend increases and a dividend yield of 2.3%. Medtronic, the world’s largest manufacturer of biomedical and implantable devices, has had 47 consecutive years of increases and has a dividend yield of 3.5%. This illustrates the point that DSAs with a modest yield, but a history of strong profitable growth may prove to be as good, or better, than DSAs with higher dividend yields but lower growth potential.
In 2023, there were 67 dividend aristocrats in the S&P 500. 42 of these were DSAs – of which 10 had achieved between 60 and 68 years of dividend increases. A yield of 0.8% may seem low, but its shares have almost quintupled over the last ten years, so those who bought a decade ago now have a yield of almost 3.8% on their original investment.
To find stocks with a consistently rising income, choose from dividend aristocrats or DSAs since their long history of rising dividends gives confidence that they can continue their year-on-year increases. However, it is always worth carrying out some additional checks on aristocrats you are thinking of investing in, for income, to make sure they will be able to keep raising their payouts.
What to check for 'super aristocrats'
- The first key criterion is that the company should still be growing its revenue and profits.
- Secondly, check that there are no factors that could cause growth to cease or reverse. An example might be a tobacco company where health regulations may be tightened to make it more and more difficult to sell its products.
- Thirdly, the proportion of earnings per share (EPS) paid out as dividends – the payout ratio – should not be too large.
A useful rule of thumb for companies (but not for investment trusts, where it is the payout ratio of the companies in their diversified portfolios that matters) is that the dividend per share (DPS) should be less than half of both EPS and cash flow per share. That ensures that dividends can still be paid and increased modestly even if EPS were to fall during a downturn. It also means that there is enough profit retained after paying dividends to invest in continuing growth.
Medtronic is an example that breaks this rule since DPS for 2023-2024 was 100% of EPS. However, research and development (R&D) comprised 8.5% of sales, so EPS is calculated after deducting the R&D investment that drives future growth. In addition, the health sector is not cyclical, so Medtronic is unlikely to suffer a substantial downturn in revenue and profits, and has of course increased its dividend each year for 47 years.
Another example is Johnson & Johnson, the pharmaceutical giant, which has raised its dividend for 62 years in a row, but has a DPS of 70.7% of EPS. Again, however, it invests very substantially in R&D (17.7% of sales).
8 dividend super aristocrats for dependable growth
We now give eight examples of potential DSA investments, each with 40-68 years of dividend increases and, in seven cases, yields between 2.3% and 3.4%. This range of yields is fairly safe, since with dividends being increased each year, the yield on an investor’s original investment will be climbing each year and will relatively soon exceed 5%, the highest available on easy-access savings accounts (which offer no capital growth).
Four of the eight DSAs are US companies, one is a UK company and three are UK-listed investment trusts that are currently selling at a discount to the value of their underlying investments.
1. Sysco Corporation (NYSE: SYY)
The first example is Sysco Corporation (NYSE: SYY) , the $37bn market cap global leader in wholesale food and food-equipment distribution to restaurants, hotels, healthcare and educational establishments. Sysco’s annual turnover is $76.4bn and it boasts 53 years of dividend increases.
The forward dividend yield is 2.8%, with a payout ratio of 48.8% and the forward price/earnings (p/e) ratio is 15.7. The recent share price is $75 and analysts see scope for the share price to reach $121 in the next five years. In May 2024 Sysco gave a financial outlook for the next three years that foresees sales growth of between 4% and 6% per year, adjusted EPS growth of 6%-8% per year and a total return to shareholders of 9%-11% per year.
2. Genuine Parts (NYSE: GPC)
Our second example is Genuine Parts (NYSE: GPC) , the $19.7billion market-capitalisation company selling vehicle and industrial parts, electrical materials and business products in the US, Europe and Australasia. Its turnover is $23bn and it boasts 68 years of annual dividend increases.
The forward dividend yield is 2.82%, with a payout ratio of 42.7% and forward p/e of 14.3. The recent price is $144 and analysts’ five-year price target is $225. Full-year 2024 guidance given with the latest results confirmed sales growth of 3%-5%, but increased expected diluted adjusted EPS to $9.80-$9.95, from the previous estimate of $9.70-$9.90.
3. Automatic Data Processing (Nasdaq: ADP)
The third example is Automatic Data Processing (Nasdaq: ADP) , the world’s largest business-services outsourcer with a market value of $101bn. Its turnover is $18bn and it has had 49 years of dividend increases. The forward dividend yield is 2.3% with a payout ratio of 59% and forward p/e of 24.8. The recent price is $249, with a five-year price target of $399. ADP’s latest quarterly results showed revenue up by an annual 7% and EPS up 15%.
4. Johnson & Johnson (NYSE: JNJ)
Our fourth US example is Johnson & Johnson (NYSE: JNJ) , the $375bn market-cap pharmaceutical company with a turnover of $85.2bn. It has a record of 62 years of annual dividend increases and a forward dividend yield of 3.3%, with a payout ratio of 70.7% and forward p/e of 14.8. The high payout ratio is acceptable given the company’s substantial R&D investment (17.7% of sales) for growth and a long record of increasing dividends. The recent price is $156 and the five-year price target is $243. Full-year guidance given with the latest results is for sales growth of 5.5%-6% and adjusted diluted EPS growth of 6.6%-8.1%.
5. Halma (LSE: HLMA)
Our fifth example is Halma (LSE: HLMA) , the £10bn market-cap FTSE-100 company with a range of products for safety, environmental analysis and health. Its turnover is £2bn and it has an incredible record of 45 years of annual dividend increases, all of 5% or more. Its forward dividend yield is 0.8%, with a payout ratio of only 29% and forward p/e of 30. The full-year results released in June 2024 showed record profits for the 21st consecutive year, with sales and pre-tax profit both up by 10% and the dividend up by 7%. The shares have gained 16% in the past year.
The final three examples are UK-listed investment trusts City of London Investment Trust (LSE: CTY) , The Scottish American Investment Company (LSE: SAIN) and the Witan Investment Trust (LSE: WTAN) , which is merging with Alliance Trust. They all have extensive portfolios of investments, providing corporate, but not necessarily geographical, diversification.
6. City of London
City of London has a 58-year history of increasing dividends. About 85% of the fund is in UK shares, with the top-ten holdings including BAE Systems , Shell, HSBC and AstraZeneca . The forward yield is 4.7% and the trailing p/e 17.5. The fund sells at a discount of 0.6% to net asset value (NAV). The shares are up by 10.4% in a year, but 1.3% over five years.
7. Scottish American
Scottish American has a 50-year record of increasing dividends, with 36% of the fund in North American equities and 35% in European ones. Top-ten holdings include Novo Nordisk and Microsoft and TSMC Taiwan Semiconductor Manufacturing Company (TSMC). The forward yield is 2.7% and the historic p/e 8.8. The trust sells at a discount to NAV of 8.2%. The shares have gained 24.3% in five years.
8. Witan
Witan has a 50-year record of dividend increases, with 39% of the fund in North America and 42% in Europe. Top-20 holdings include Amazon , Unilever, Diageo, Microsoft, Nvidia, Nintendo and Alphabet . The forward yield is 2.2% and the trailing p/e 9.7. The trust sells at a discount of 5.2%. The shares are up 20.4% over one year and 22.4% over the last five.
For investors requiring the highest immediate yields, together with the confidence that a record of over 50 years of consecutive dividend increases brings, City of London (with a yield of 4.7%, but a modest growth record) and Johnson & Johnson (yielding 3.3% and a five-year share-price target 56% above current levels) are probable choices.
Sysco (with a yield of 2.8% and a target of 61% above today’s price), or Genuine Parts (2.82% and a target of 56% above) have yields of just under 3% and good growth prospects. Halma (yielding 0.8%) is a longer-term prospect with its excellent history of share price, profit and dividend growth.
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