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All Contents © 2019The Kiplinger Washington Editors
By Dan Burrows, Contributing Writer
| October 4, 2017
The Dow Jones Industrial Average and other major indexes are hitting all-time highs regularly, and that is making it increasingly difficult to find bargains. That’s especially true among Dividend Aristocrats – Wall Street’s elite group of payout-raising companies.
Investors are willingly paying almost 18 times expected earnings for the companies in Standard & Poor's 500-stock index. That price-to-earnings multiple exceeds the index's five-year average of 15.6 and its 10-year average of 14.1, according to data from FactSet.
But that pales in comparison to the Dividend Aristocrats – 50 companies in the Standard & Poor's 500-stock index that have hiked their dividends every year for at least 25 consecutive years. At the moment, these stocks are trading at nearly 21 times forward earnings estimates. So, what’s an income-minded value investor to do?
Fortunately, a few Dividend Aristocrats are offering up their impressive track records of persistent and consistent distribution hikes at affordable prices. Here are five Aristocrats – spanning several industries – that are relatively cheap in a pricey market.
Data is as of Oct. 3, 2017, unless otherwise indicated. Click on symbol links in each slide for current share prices and more.
Companies are listed in alphabetic order. Analysts’ ratings provided by Zacks Investment Research. The list of 50 Dividend Aristocrats is maintained by S&P Dow Jones Indices.
Share price: $82.23
Dividend yield: 2.1%
Consecutive annual dividend increases: 34
Forward price-to-earnings ratio: 12
Analysts’ opinion: 2 strong buy, 1 buy, 6 hold, 1 underperform, 2 sell
Insurer Aflac, which does business in Japan and the U.S., is better known for its Aflac Duck advertising campaigns than for its dividend. And yet, the stock not only sports a higher yield than the S&P 500 as a whole, but it's far cheaper too. Shares trade at 12 times forward earnings estimates from analysts surveyed by Thomson Reuters. Again, the S&P 500 currently fetches roughly 18 times predicted earnings, and the Dividend Aristocrats trade at 21 times profit forecasts.
Aflac should receive help in the form of rising interest rates, as insurers earn interest on the premiums they collect before they are paid out in claims.
Shareholders also should benefit from the company’s stock repurchase program. Aflac currently is buying back up to 56 million of its own shares in 2017. That equates to $4.6 billion at today's stock price.
Share price: $39.48
Dividend yield: 5%
Consecutive annual dividend increases: 33
Forward P/E: 13
Analysts’ opinion: 5 strong buy, 1 buy, 12 hold, 0 underperform, 0 sell
The telecommunications services sector is well-known for dividends, and AT&T offers one of the best all-around yields in the space.
The company has paid uninterrupted dividends since 1984 and has raised its payout annually for more than three decades. Moreover, AT&T’s dividend routinely makes it one of the highest-yielding common stocks on the market – well above the 2% yield of the S&P 500. But unlike telecoms like Windstream (WIN) and Frontier Communications (FTR) that have had to cut their payouts over the past few years, AT&T’s dividend is well-backed by the company’s high cash flow.
Although phone service remains AT&T’s core business, the company is moving aggressively into pay-TV and content production with acquisitions such as DirecTV and a pending deal to buy Time Warner – an entertainment giant whose lineup includes CNN, HBO and the Warner Bros. movie studio. Analysts aren’t certain the deal will go through because of antitrust issues. But even without Time Warner, AT&T still should grow profits by 3.5% in 2017 and nearly 2% in 2018.
Add in the healthy dividend, and this Dividend Aristocrat’s forward P/E of 13 looks like a pretty good deal in a pricey market.
Share price: $132.10
Dividend yield: 2.5%
Consecutive annual dividend increases: 55
Forward P/E: 17
Analysts’ opinion: 5 strong buy, 1 buy, 8 hold, 0 underperform, 2 sell
Few Dow stocks are as well-known as Johnson & Johnson. It operates in several areas of the health care industry, including pharmaceutical products and medical devices. But the company is best known for its over-the-counter consumer brands, including Listerine mouthwash, Tylenol pain reliever and Johnson’s baby shampoo. This sprawling portfolio has helped fuel a long string of dividend increases that spans more than five decades.
JNJ also happens to be one of the few giant Dividend Aristocrats trading at an attractive price. The stock goes for 17 times expected earnings – cheaper than the S&P 500 and roughly in line with its own five-year average. Better still, earnings per share are forecast to increase 7% this year and another 8% next year.
Another feather in J&J's cap? Health care is a defensive sector and should hold up better if the market rolls over.
Share price: $78.11
Dividend yield: 2.4%
Consecutive annual dividend increases: 40
Forward P/E: 15
Analysts’ opinion: 10 strong buy, 1 buy, 7 hold, 0 underperform, 0 sell
Take a look around a doctor's office or emergency room, and you're likely to see some of Medtronic's products. The medical device maker is among the largest in the world, providing everything from insulin pumps for diabetics to stents used by cardiologists.
Like J&J, Medtronic is in a defensive sector that should hold up better in a general market decline. It also has a history of taking care of its shareholders – the company has steadily increased its dividend every year over the past four decades.
MDT looks like a healthy choice for value investors. The stock goes for 15 times forward earnings, which is well below what investors are paying for the S&P 500's estimated profits. Medtronic has growth prospects, too, with analysts forecasting average annual profit expansion of almost 7% for the next five years.
Share price: $79.22
Dividend yield: 2.6%
Consecutive annual dividend increases: 44
Analysts’ opinion: 10 strong buy, 0 buy, 10 hold, 0 underperform, 2 sell
Walmart, the world's largest retailer and another Dow component, isn't conceding the race to Amazon.com (AMZN), even as the online juggernaut claims an ever-larger piece of the retail pie.
Walmart went on the offensive in 2016 by spending more than $3 billion to acquire Jet.com, an up-and-coming online retailer. It has since added Moosejaw, Bonobos and ShoeBuy to its e-tailer portfolio.
Although Amazon is expected to turn Whole Foods' stores into distribution centers for its AmazonFresh delivery service, there's no reason Walmart can't use its own stores in a similar way. Analysts at Cowen note that about 90% of the U.S. population lives within 10 miles of a Walmart store. In fact, the company recently made another acquisition focused on delivery, buying up startup Parcel to help Walmart launch same-day delivery in New York City.
So don't throw dirt on Walmart just yet.
Meanwhile, WMT hits all the right fundamental notes. The stock’s forward P/E is lower than that of the broader market, and its 44-year streak of payout increases is more than enough to justify its inclusion in the Dividend Aristocrats.