Source: Simon Cunningham/Flickr.
This article was updated on May 5, 2016.
Companies that have raised their dividend payments for at least 25 consecutive years are known as dividend aristocrats. It's an exclusive club, with the ProShares S&P 500 Dividend Aristocrats ETF (NOBL 0.22%) containing just 51 companies.
Many of these dividend aristocrats come with fairly lofty valuations, with investors willing to pay a premium for a reliable source of growing dividends. Now nearly half way into 2016, which of these companies offer the best investment opportunity? Five of our Foolish contributors have some ideas.
Tim Green: Retailer Wal-Mart (WMT 1.09%) is going through a bit of a rough patch. Sales and profits are falling, thanks to both currency issues and investments in pricing, higher wages, and e-commerce. The company expects EPS to decline in fiscal 2017, with growth returning in 2018 and ramping up in 2019. Under the worst-case scenario laid out by the company, earnings will slump to their lowest level since 2009.
This kind of guidance isn't something dividend investors generally want to hear. Wal-Mart has increased its dividend for 43 consecutive years, with its latest dividend increase occurring in February. But with annual dividend payments currently at $2 per share, compared with earnings that could fall below $4 per share in 2017, Wal-Mart's payout ratio will hit record levels even if the dividend is kept flat.
One thing is certain: Dividend growth is going to be slow over the next few years. But I don't think dividend investors should avoid the stock for this reason alone. Because shares of Wal-Mart have declined over the past year, the dividend yield is now about 3%, far higher than it's been historically. Although shares have recovered in recent months, dividend investors can still buy the stock for a depressed price. Compared with other dividend aristocrats that carry lofty valuations, Wal-Mart is a veritable steal. If the company's investments pay off in the long run, both earnings and dividend growth could come roaring back.
Daniel Miller: One company that's been on my watch list for some time and is really making a case to be a top dividend aristocrat in 2016 is Archer-Daniels Midland Co. (ADM 0.83%). ADM processes, transports, stores, and sells agricultural commodities. For example, ADM is a large processor of soybean oil and meal, with the former being sold to food customers, while the latter is sold to feed customers. Corn is another big product for ADM, as the product is used in sweeteners and starches -- recognize high-fructose corn syrup on anything in your pantry? -- or ethanol.
ADM has caught my eye recently, after a rough 2015 that saw its stock price drop nearly 30% and a third quarter that brought investors a 9% drop in revenue and a 66% drop in net income compared with the prior year. The fourth quarter of 2015 and the first quarter of 2016 were just as bad, and with pressure on commodities expected to continue, especially ethanol for ADM, 2016 could prove to be a good time to scoop up shares of this ancient company.
ADM has been around for 11 decades and paid a dividend since 1927. It's currently dishing out a $0.30 quarterly dividend per share for a yield of roughly 3.1%. ADM is also trading at a forward price-to-earnings ratio of about 13.2, which suggests there is some value here for investors with a long-term perspective. ADM stands to benefit from its global network of processing, transportation, and storage infrastructure, which gives it an advantage over competitors even if margins remain slim in this industry.
Andres Cardenal: When picking top-quality dividend aristocrats, you want to go with companies with a proven ability to generate consistently growing cash flows through good and bad economic times, and The Clorox Company (CLX 0.58%) is one of the most dependable dividend stocks in the market.
The company owns several leading brands in the household product category, including widely recognized names such as Clorox, Glad, Hidden Valley, and Kingsford. With the purchase of Burt's Bees in 2007, Clorox made a big entry in the rapidly growing natural personal-care category.
Clorox makes over 80% of revenue from brands occupying a first or second market share position in their respective industries, and it operates in stable and mature industries. This positioning provides predictability to the company's cash flows, a key valuable trait among dividend stocks.
Source: Clorox.
Clorox has a remarkably solid trajectory of dividend growth. The company has raised dividends every year since 1977. In addition, Clorox allocates tons of capital to share buybacks. The company has reduced the amount of shares outstanding by more than 40% over the past decade.
The dividend payout ratio is around 62% of earnings, which is not excessively high for a rock-solid dividend stock such as Clorox. At current prices, Clorox stock pays a dividend yield of 2.4%.
Todd Campbell: Dividend stocks may lose a little luster if interest rates rise on bonds, but it could still make sense to own dividend-paying aristocrats in portfolios in 2016, including Johnson & Johnson (JNJ -2.71%).
Johnson & Johnson has boosted its dividend payment for 53 consecutive years, and while its 2.85% dividend yield isn't as high as some other aristocrats, the company's diverse revenue stream has historically made it a good bet to own in both good and bad times.
Top brands such as Aveeno and Band-Aid mean almost 20% of its sales come from consumer goods. Another 35% of its sales come from selling medical devices. And thanks to blockbuster prescription medicines such as Remicade and Xarelto, pharmaceuticals account for about 45% of its sales.
That revenue diversification (and a rock-solid balance sheet) led Johnson & Johnson's shares to lose just 7.7% of their value in 2008, when the financial crisis knocked the SPDR S&P 500 ETF (SPY 0.15%) down 36.8%. That performance is even more impressive when we consider that its shares have nearly doubled since 2008 as the economy rebounded. Given the company's track record for dividend increases and returns, Johnson & Johnson could be a top aristocrat to own next year.
Tyler Crowe: With oil and gas prices still wreaking havoc across the energy space, it takes a bit of confidence in a management team to think that an energy company can maintain its dividend aristocrat status. So if picking a dividend aristocrat based on its management team, then I'll have to go with ExxonMobil (XOM -1.67%). The last time a dividend payment from ExxonMobil was lower than the previous year's was in 1948, and only twice since then as a dividend payment remained the same as the year prior.
There are two principal reasons ExxonMobil has been able to achieve this record: cost management and continuous investment through the ups and downs of the industry. Thanks to its focus on keeping costs down, the company has been able to generate enough cash from operations as of late to fund both its capital spending program and its dividend. This is something that no other Big Oil peer can say right now, as the rest have needed to rely on large asset sales and debt issuances to meet this spending needs.
Shares of ExxonMobile still trade for less than they did at the start of 2015. However, once the lack of investment in the oil and gas space starts to catch up with production levels, ExxonMobil's investing though the cycle style will look like a smart move. This gives investors a nice multi-month window to accumulate shares of ExxonMobil at a decent discount.
