Dividend aristocrats are popular with investors. That's not surprising, as these stocks have a history of consistently growing their dividends over time.
Susan Dziubinski, a Morningstar investment specialist, reported in a blog post this week that some 60 companies that have increased their dividends every year for 25 years or longer are among companies included in the S&P 500 index.
These are mature companies with enough earnings to continue to increase their dividends, and are run by management teams that prioritize dividends in the capital structure. Investors who buy dividend aristocrats expect them to be able to grow their dividends in the future.
Compelling as dividend aristocrats may be, however, investors should be aware of several caveats.
These companies can, in fact, cut their dividends if business conditions warrant, according to Morningstar DividendInvestor editor David Harrell, who points to AT&T and VF Corp. as examples of onetime members of this elite group that have done so in recent years.
How can investors avoid those that are likelier to cut their dividends? Morningstar’s research shows that companies with wide economic moats tend to be less likely to cut their dividends than those with narrow moats, according to the firm’s index strategist Dan Lefkovits. “No-moat businesses are most likely to cut,” he says.
Another caveat, Harrell says, is that dividend aristocrats are not necessarily high-dividend stocks; some 40% of them yield less than 2%.
Finally, Morningstar does not consider dividend aristocrats attractive unless they are underpriced, pointing out that investors who overpay for a stock simply because of its solid history of dividend growth only increase price risk in their portfolios.
To come up with a list of the best dividend aristocrats to buy, Morningstar analysts screened for dividend stocks included in the ProShares S&P 500 Dividend Aristocrats ETF and those with economic moat ratings of narrow or wide. The top ones were trading at among the largest discounts to Morningstar’s fair value estimates as of Oct. 24.
See the gallery for the 10 best dividend aristocrats to buy now, according to the analysts. Year-to-date performance is as of Oct. 29.
Images: Chris Nicholls/Touchpoint Markets
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