High-yield aristocrats: 10 dividend favorites

by Chuck Carlson, editor The DRIP Investor

Dividend stocks as a group performed well on a relative basis in 2011, as investors, hungry for more cash flow and less volatility, snatched up dividend payers. And corporations did their part, boosting dividends at a rate not seen since 2007.

According to Standard & Poor’s, dividend increases reached more than $50 billion in 2011, up more than 89% from 2010. Overall, S&P reported 1,953 positive payout actions -- the highest since 2007.

Dividends should continue on the upswing in 2012 for at least four reasons:

• Companies have nearly $2 trillion in cash sitting on their balance sheets. That’s cash that can be used to boost dividends.
  
  
• Corporate profits set an all-time high in 2011, and profit growth should continue in 2012. Companies should be willing to share that growing profit pool with shareholders in the form of higher dividends.
  
  
• The percentage of corporate profits being paid out in dividends (known as the “payout ratio”) is 28%, well below the 20-year average of 40%. Said differently, corporate America could boost dividends an aggregate 43% in 2012, and the pay- out ratio would only be back to its 20-year average.
  
  
• It is clear investors want dividends. With money markets yielding slightly above zero and many bonds hardly boasting rich yields, investors are desperate for dividends.

The lust for dividends was quite evident in 2011 when dividend-paying stocks represented one of the few sweet spots in the market.

Corporate executives no doubt saw the interest and demand for dividend stocks in 2011 and are likely to be more predisposed to boosting dividends to help attract investors to their shares.

Which companies are likely to boost their dividends in 2012? One good hunting ground is a universe of stocks that have a history of boosting their dividends.

S&P releases each year its list of “dividend aristocrats.” These are stocks that have boosted their dividends annually for at least 25 years.

S&P's High Yield Dividend Aristocrat Index is comprised of the 60 highest-yielding constituents of the stocks of the S&P Composite 1500 Index that have increased dividends every year for at least 25 consecutive years.

The list contains a number of our favorite DRIPs (dividend reinvestment plans). I’m especially fond of ExxonMobil (XOM), PepsiCo (PEP), Procter & Gamble (PG), and Walgreen (WAG).

Not only has each of these firms boosted dividends annually for more than a quarter century, but the dividend-growth rate has been impressive.

I’ve owned each of the stocks for a long time, and those rising dividend streams have been especially beneficial in building up my share count via dividend reinvestment.

I would feel comfortable buying all four stocks at current prices, especially Walgreen, which is depressed and offering a particularly good buying opportunity for long- term investors.

Other favorites on the list include insurers Aflac (AFL) and Chubb (CB); Wal-Mart Stores (WMT); health-care companies Abbott Laboratories (ABT) and Medtronic (MDT); and diversified conglomerate Dover (DOV). All of these stocks are good buys at current prices.

For investors who prefer to own all high-yield dividend aristocrats in a single investment package, the SPDR S&P Dividend (SDY) exchange-traded fund may be of interest.

The ETF mirrors the S&P High Yield Dividend Aristocrat index. The ETF is coming off a solid 2011 performance, posting a total return of more than 7% versus a 2.1% return for the S&P 500 Index.

What may be even more impressive was the ETF’s relative performance during the disastrous 2008 market collapse. The ETF declined less than 23% versus a 37% decline by the S&P 500. The current yield is around 3.2%. Annual expenses are 0.35%.

Learn more a bout this financial newsletter at Chuck Carlson's The DRIP Investor.