Jim Cramer recently featured the S&P Dividend Aristocrats on his "Mad Money" TV show. This Stockpickr portfolio consists of S&P 500 companies that have increased their dividends every year for the past 25 years.
These names offer investors big rewards, because what starts off, perhaps, as a 1% yield when you first buy the stock could end up becoming a yield of 20% or more when compared with your initial purchase costs.
The fact that these companies have increased their dividends every year for the past 25 years gives you a significant margin of safety.
Of course there are no guarantees, but chances are these are well-managed companies with increasing cash flows and reason to believe they'll increase those dividends in the future.
There are three portfolios worth looking at:
- The S&P Dividend Aristocrats portfolio.
- Cramer's Aristocrats, his top three picks from the above list.
- Cheap Aristocrats, a list compiled by a Stockpickr user that contains his own version of those Aristocrats he considers to be cheap values.
Let's take a look at the stocks that appear to have the most margin of safety in terms of their balance sheets, their historical growth, their yield, etc.
First up, there's
Automatic Data Processing
. This company is a rock. (Of course, in the interest of full disclosure, I should mention that I temped at ADP for a week in 1987, making about $8 an hour. I accidentally put the wrong checks in the wrong envelopes, and after a week they had had enough of me.)
ADP processes payroll and benefits packages for thousands of companies. If you hire ADP to handle your payroll, chances are you're never going to take on that task in-house again.
ADP has $1.5 billion in the bank and no debt. It has $2.2 billion in EBITDA and trades at only 10 times EBITDA. My only concern here -- especially if I were an ADP employee -- is that the company can easily get taken over by raiders who leverage up, buy the company and live off the massive cash flows.
Is the company still growing? Last year it generated earnings of $1.49 a share. This year, analysts expect EPS of $1.83, and $2.16 next year. It also has a 2% yield.
Another company that has increased dividends for the past 25 years and is cheap relative to its historical valuation right now is
. The company makes and distributes chemicals and kits for genomic research, biotech research and pharmaceutical development.
Sigma-Aldrich offers an excellent, indirect way to play the aging baby boomer trend. Because of the size of that generation, you can expect more research, more drugs and more development in the biotech/pharma space over the next 50 years.
Sigma-Aldrich has a rock-solid balance sheet with $173 million in cash, about $500 million of debt, but with $509 million in EBITDA and growing. Again, at 11 times cash flows, the only thing that worries me is that the company can get acquired too quickly to enjoy the next 25 years of dividend increases.
Sigma-Aldrich is also listed in the
, an exchange-traded fund that tracks companies where there's been heavy insider buying and analysts recently have increased estimates.
In fact, about 90 days ago, analysts had expected, on average, Sigma-Aldrich to hit $2.15 in EPS for 2007. Now they expect $2.20. And recently, several officers of the company have bought Sigma-Aldrich shares on the open market. Other stocks on the Claymore/Sabrient Insider ETF include
One of Jim Cramer's favorites on the Aristocrats list is drugstore chain
. For the past 20 years,
has haunted Walgreen investors. There's always the fear that Wal-Mart can infringe on Walgreen's business.
That said, however, Walgreen has a lot of cushion, with about $1 billion cash in the bank, no debt and EBITDA of $3.8 billion on an enterprise value of $45 billion, giving it an enterprise value over EBITDA of just 12.
Walgreen's 22-year chart offers a not-so-bad picture either:
Here are some of my other favorite dividend portfolios:
- Top 100 Highest-Yielding Stocks That Pay Monthly Dividends.
- Microcaps With Dividends.
- Dividends Are Important, a list of stocks that pay dividends and also have very low payout ratios -- suggesting they can handle a decline in revenue before having to cut their dividends.
- European Banks With Dividends, names that offer diversification out of the U.S. dollar.
- Closed-End Funds Paying Hefty Dividends.
- Income Deposit Securities, a list of stocks that are hybrid stocks/bonds and that pay high yields.
- High-Yield Tobacco Stocks.
- Morgan Stanley: A Yen for Yield, a list of stocks compiled from the Jan. 22 issue of Barron's, which stated: Morgan Stanley's chief U.S. investment strategist, Henry McVey, says the Pension Protection Act of 2006 "adds legs" to his research team's Brave New World thesis -- that as retiring baby boomers start positioning their individual retirement accounts and 401(k)s for income, rather than asset accumulation, they'll boost demand for "equity securities that provide both healthy yield and solid earnings growth." To that end, he came up with 45 possible candidates. The accompanying table lists the top 25, based on yield.
At the time of publication, Altucher and/or his fund had no positions in stocks mentioned, although positions may change at any time.
James Altucher is a managing partner at Formula Capital, an alternative asset management firm that runs several quantitative-based hedge funds as well as a fund of hedge funds. He is also the author of
Trade Like a Hedge Fund
Trade Like Warren Buffett
. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Altucher appreciates your feedback;
to send him an email.
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