Editor's pick: First published Feb. 22.
Dividend Aristocrats are a group of 50 stocks in the S&P 500 Index that have increased their dividend payments for at least 25 consecutive years, a sign of impressive profitability, financial strength, and management's confidence in the business.
These companies have collectively outperformed the S&P 500 Index with lower volatility and represent some of the best blue chip dividend stocks in the market.
You can view the complete list of dividend aristocrats by clicking here. Not all dividend aristocrats are created equal, and some are sure to fall off the list over the next decade as the world continues evolving and unexpected headwinds emerge.
Looking at each of the 50 dividend aristocrats on the list today here are the top 10 dividend stocks that could be the most successful companies over the next decade and beyond.
While no one can predict the future, these are likely the best dividend aristocrats to buy and hold for many years to come. Several are in this Top 20 Dividend Stocks portfolio.ECL data by YCharts
1. Ecolab (ECL)
Ecolab sells a wide range of sanitizing, cleaning, and water treatment systems that help customers in virtually every end market maintain clean environments, keep their food safe, and optimize their use of energy and water. Altogether, the company serves over 1 million customer locations in more than 170 countries.
Ecolab is one of the best dividend aristocrats to own for the long term because of its leading technology portfolio, sticky customer relationships, and large opportunity for growth. The company has over 25,000 employees that visit customer sites to replenish consumable products (which account for roughly 90% of Ecolab's total revenue) and cross-sell them new products and services. Altogether, Ecolab believes its addressable market is $100 billion in size and that customers are spending roughly $6 on addressable products for every dollar of business they currently have with Ecolab. We believe the company will continue taking share and deepening its customer relationships over the next 10 years.
While Ecolabl doesn't have the highest dividend yield, its dividend growth has been excellent. Management has increased the dividend by 14% per year over the last decade and by 17% per year over the last three years. Macro headwinds have slowed growth more recently, resulting in a 5% dividend increase earlier this year, but we expect this business to continue delivering at least high-single dividend growth longer term. With a payout ratio below 40% and excellent free cash flow generation, Ecolab will continue rewarding dividend growth investors.
ECL's stock has a dividend yield of 1.3% and trades at 24.7-times forward earnings estimates. Management believes the company can continue delivering 15% annual earnings growth longer term, which would make this one of the fastest-growing dividend aristocrats.
2. Johnson & Johnson (JNJ)
Johnson & Johnson is one of the 25 stocks in this Conservative Retirees dividend portfolio. The company is one of the largest and most diversified healthcare companies in the world. Over half of its profits come from branded pharmaceutical sales, but Johnson & Johnson also has sizable consumer and medical devices businesses, which nicely diversify its cash flow. By geography, Johnson & Johnson generates a little over half of its sales in international markets, which should see higher spending on healthcare over the next 10 years and beyond.
Johnson & Johnson spends over $8 billion on research and development each year and has one of the most proven track records when it comes to developing new drugs. Its consumer products and medical devices also provide the business with more predictable cash flows to fund its higher-margin drug development, and management remains highly focused on only investing in markets that the company can dominate. As a result, roughly 70% of Johnson & Johnson's revenue is from products that have number one or number two market share positions,
The company has increased its dividend by 8.8% per year over the last decade and by 7.1% over the last three years. With over $37 billion in cash on hand compared to $14 billion in debt and a modest payout ratio of 54%, Johnson & Johnson can easily afford to continue its mid-single digit dividend growth rate.
JNJ's stock trades at 16.0-times forward earnings estimates and has a dividend yield of 2.9%. We think this company can continue generating mid-single digit earnings growth over the long term, especially as it deploys its excess cash. Under these assumptions, the company's total return potential appears to be 7%-to-9% per year.
3. Genuine Parts (GPC)
Genuine Parts is one of the largest distributors of automotive and industrial replacement parts and also distributes office products and electrical materials. The company was founded in 1928 and conducts most of its business in the United States (82% of sales) and Canada (10%). In its automotive business, which generates a little over half of total revenue, the company operates under the well-known NAPA brand.
Genuine Parts has several competitive advantages that are primarily rooted in convenience. For example, Genuine Parts has the largest auto parts network in the country and is able to offer 24/7 product delivery. The company's size also allows it to hold roughly $3 billion worth of merchandise to give customers the broadest assortment of products to pick from. The combined size of Genuine Parts' auto and industrial markets is approximately $170 billion, and the company's market share is less than 8%, providing plenty of room for growth as it continues on its path of consolidation.
Genuine Parts has increased its dividend for more than 50 consecutive years, qualifying it to join the list of dividend kings. Management has reliably increased the company's dividend by roughly 7% per year for more than a decade, and expect this reliable growth to continue thanks to the company's 53% payout ratio and reliable cash flow growth resulting from the stable nature of aftermarket business.
GPC's stock has a dividend yield of 2.9% and trades at 19.8-times forward earnings estimates. Management believes the company can grow its earnings per share by 7%-to-10% per year, which would result in total return potential of 10%-to-13% per year.
4. PPG Industries (PPG)
Founded in 1883, PPG is one of the biggest manufacturers of paints and coatings in the world. Most of the company's products are used in construction, automotive, and industrial markets. The business is also very global with over half of its sales taking place outside of North America.
While paint might seem like a commodity at first glance, PPG focuses on special-purpose coatings that can significantly increase how long products last and make them visually more appealing. The company invests roughly 3% of its sales in research and development to improve the technology of its coatings, making its products appropriate for use in some of the harshest environments around the world. As a result of the company's focus on specialty applications, it generates excellent margins and has successfully raised prices each of the last 10 years.
The company has raised its dividend for more than 40 consecutive years and recorded 4.3% compound annual dividend growth over the last decade. However, dividend growth has accelerated to 6.5% per year over the last three years and should remain very strong with an earnings payout ratio below 30%.
PPG's stock trades at 15.2-times forward earnings estimates and has a dividend yield of 1.5%. This is a dividend aristocrat that can compound its earnings by 6%-to-8% per year, which would generate a total return of 8%-to-10% per year.
5. PepsiCo (PEP)
PepsiCo has some of the most famous consumer food and beverage brands in the world, including Pepsi-Cola, Gatorade, Frito-Lay, Quaker, and Tropicana. The company's largest 22 brands each generate at least $1 billion in annual sales and have established themselves as favorites with consumers. Just over half of PepsiCo's sales are in North America, and the business is roughly split equally between beverages and snacks.
PepsiCo's main advantages are its established brands and distribution channels. The company invested over $35 billion last year on sales incentives to maintain its shelf space, maintain in-store displays, and distribute its products to stay in front of consumers. PepsiCo's unique positioning as a dominant provider of snacks and beverages also makes it a key vendor for its retail customers because it can serve as more of a one-stop shop. In North America, PepsiCo is roughly two times as large as the next-largest supplier in the food and beverage market.
The company's dividend has compounded by 10.6% over the last 10 years, and growth in recent years has averaged about 9%. This dividend aristocrat has a payout ratio of about 50%, which should provide plenty of room for future dividend growth.
PEP's stock has a dividend yield of 2.8% and trades at 21.7-times forward earnings estimates. The company's free cash flow per share has grown by 11% per year over the last five years, and we believe this business can continue generating profit growth of at least 6%-to-8% per year, which would result in a total return of 9%-to-11% per year.
6. Cintas (CTAS)
Cintas is a lesser known dividend aristocrat but is the biggest provider of uniform rental services in the country. It serves more than one million business customers operating in a wide variety of service-providing and goods-producing industries. The business makes money by renting out uniforms for workers to wear, collecting them, washing them, and sending them back to be used again.
While this is certainly a boring business, it has numerous competitive advantages that generate very predictable cash flows that can be used for dividend growth. Cintas has over 8,000 local delivery routes, which help it offer reliable service and relatively low costs for each region it operates in. New entrants to the market would find it challenging to disrupt the company's customer relationships and would lack the route density enjoyed by Cintas to challenge it on pricing. Cintas can also cross-sell additional products and services when its reps visit customers' locations, further improving its long-term growth prospects.
The company has increased its dividend for over 30 consecutive years and has one of the best dividend growth profiles of all the dividend aristocrats thanks to its 28% payout ratio and opportunity to continue consolidating its fragmented industry. Cintas has increased its dividend by 13% per year over the last decade and boosted its dividend by a healthy 24% last year.
CTAS' stock trades at 21.2-times forward earnings estimates and has a 1.3% dividend yield. While this yield is too low for investors living off dividend stocks in retirement, the stock's total return potential is not worth ignoring. Cintas can continue growing its earnings per share at a high-single digit rate over the next decade, which would result in total return potential of 8%-to-10% per year.
7. Colgate (CL)
Colgate was founded in the early 19th century and sells some of the most well-known consumer brands in the world, including Colgate, Protex, Palmolive, Speed Stick, and Irish Spring. Approximately 46% of the company's sales were from oral care products last year, with another 21% from personal care items and 20% from home care goods such as household cleaners and liquid fabric conditioners. Importantly, roughly half of Colgate's sales are from emerging markets, which should see per capita consumer spending rise over the coming decades.
As a consumer-focused business, Colgate's biggest advantage is its mind share with consumers. The business spends nearly $2 billion on advertising each year to maintain its brand equity. The company also spends several hundred million dollars on research and development to keep its produce lineup fresh and relevant. As a result of its long-standing operating history, investments in branding, and global distribution, Colgate has amassed a whopping 45% global market share in toothpaste and is the number one or number two player in mouthwash, hand soap, toothbrushes, household cleaners, and liquid fabric conditioners.
While the company's dividend growth has decelerated from an 11% compound annual growth rate over the last 10 years to a 7% growth rate the last three years, the future remains bright. Colgate's payout ratio sits below 60%, and the company has plenty of opportunities for growth in emerging markets. Management's commitment to the dividend is also worth noting as Colgate has paid uninterrupted dividends for an astounding 120 straight years.
CL's stock trades at 24.2-times forward earnings estimates and has a 2.3% dividend yield. We expect this dividend aristocrat to grow its earnings per share by 6%-to-8% per year going forward, which would result in total return potential of 8%-to-10% per year.
8. Stanley Black & Decker (SWK)
Stanley Black & Decker is one of the oldest companies around with roots tracing back to 1843. The company sells a wide range of power drills and hand tools, security systems, and other products used in industrial markets. Altogether, Stanley Black & Decker's portfolio consists of more than 500,000 products and has meaningful exposure to construction, industrial, and automotive markets.
Stanley Black & Decker's key competitive advantages are its strong brands, reputation for quality, and innovation. The company has over 13,000 active global patents and introduces roughly 1,000 new products each year, ensuring that it stays relevant with customers. Furthermore, the company has long-lasting distribution relationships and has locked down premium shelf space at the biggest retailers. As a result, the company has the No. 1 market share positions in its power and hand tools.
The company has increased its dividend at a 5% compound annual growth rate over the last five years and has reliably raised its dividend for nearly 50 straight years. With a 40% payout ratio and excellent free cash flow generation, we believe Stanley Black & Decker can continue increasing its dividend at a mid-single digit rate for years to come.
SWK's stock trades at 15.1-times forward earnings estimates and has a dividend yield of 2.4%. Management believes the company's earnings per share can grow by 10%-to-12% over the next few years; expect the company to achieve a mid-single digit growth rate over the longer term. Under these assumptions, the stock appears to offer total return potential of 9%-to-11% per year.
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9. Procter & Gamble (PG)
Procter & Gamble is one of the safest dividend aristocrats that money can buy. The company sells well-known consumer products under famous brands such as Pampers, Tide, and Head & Shoulders. More than 20 of Procter & Gamble's brands have annual sales of at least one billion dollars and are sold in over 180 countries worldwide. With over $8 billion spent on advertising last year, the company's products are able to maintain strong market share positions and remain at the forefront of consumers' minds when they go to make a purchase.
In response to several years of sluggish growth, the company is in the process of shedding some of its under-performing brands, which represent roughly 15% of Procter & Gamble's total sales. However, the company's remaining brands have demonstrated solid sales growth and above-average company profitability. This is the right long-term decision for the company, and the transformation is expected to be completed by the end of 2016. Procter & Gamble also expects to return up to $70 billion to shareholders in the form of dividends and share repurchases over the next several years as a result of its strategic plan.
Procter & Gamble has grown its dividend at a 9.7% compound annual growth rate over the last decade, but its dividend growth has slowed to a 6.7% annualized rate over the last three years. Expect dividend growth to remain in the low- to mid-single digits as the company transitions its brand portfolio and positions itself for more sustainable earnings growth. Until then, Procter & Gamble remains in a very healthy position with a payout ratio of roughly 60%.
PG's stock trades at 22.6-times forward earnings estimates and has a dividend yield of 3.2%. Once the company works through its portfolio transformation, earnings-per-share growth can resume at a 4%-to-6% annual rate, which suggests annual total return potential of 7%-to-9%.
10. T. Rowe Price (TROW)
T. Rowe Price is one of the largest asset managers in the world. The company offers a wide range of mutual funds that pursue investment styles including growth, value, sector-focused, tax-efficient, and quantitative approaches. By assets under management, close to 80% of T. Rowe Price's assets are in stock and blended asset portfolios with the remainder invested in fixed income securities and money market portfolios.
This is one of the best dividend aristocrats to own because of its brand strength, strong performance track record, relatively low management fees, strong distribution channels. The company will also benefit from the increasing number of baby boomers retiring because retirement-related assets account for roughly two-thirds of T. Rowe Price's assets under management. These also tend to be stickier accounts since most retirees are looking for stability rather than trying to maximize their returns.
The company's regular dividend was increased by 18% in 2015 and has compounded at a healthy double-digit rate over the last five years. T. Rowe Price's financial strength has also allowed it to reward shareholders with special dividends in 2015 and 2012. With a normalized payout ratio (excluding the special dividend) sitting near 40%, we expect annual dividend growth of at least 10% per year going forward.
TROW's stock has a dividend yield of 3.1% and trades at 15.5-times forward earnings estimates. We believe the company can continue generating at least high-single digit earnings growth going forward, which would result in total return potential of roughly 11% per year. While the company is sensitive to broader moves in the stock market, we think its earnings power will be much higher in 10 years.