These stocks could become the new Dividend Aristocrats

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MSCI

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• Annual dividend increases over a long period of time make dividend aristocrats
• a long-term increase in dividends can be a better investment criterion than the actual dividend yield
• MarketWatch identifies US public companies that could become Dividend Aristocrats

The continuous increase in dividends is an important criterion for many investors when deciding whether to invest in a particular company or not. There are some publicly traded companies that have been increasing their payouts every year for more than 25 years. An index that tracks such companies is the S&P 500 Dividend Aristocrats. It is irrelevant for inclusion in the stock market barometer how high the dividend yield is, the only thing that counts is that the distribution has been increased for at least 25 years in a row and that the company is in the US S&P 500 index. There are currently 65 stocks in the S&P 500 Dividend Aristocrats index. As MarketWatch writes with reference to FactSet data, the dividend index would have clearly beaten the market-wide S&P 500 measured over the last 15 years with a return of 451 percent (320 percent for the US index).

Why an investment in dividend aristocrats can be worthwhile

There are certainly investors who, when selecting stocks, attach more importance to the fact that the current dividend yield is high than that the distribution is increased every year. However, it can be worthwhile, especially with long-term investments, to ensure that the selected company reliably adjusts the distribution upwards. MarketWatch explains the potential benefit of this using the example of Automated Data Processing stock. On March 2, 2018, the ADP share price was $113.60. The annual dividend at the time was $2.52 per share, a yield of 2.22 percent. Five years later, on March 3, 2023, a share cost $224.75, the annual payout is $5 per share, with an unchanged yield of 2.22 percent. However, if you bought into ADP five years ago, the dividend yield is now 4.4 percent.

Criteria when selecting future dividend gems

In order to find out which companies could belong to the dividend aristocrats in the future, MarketWatch took the even broader S&P Composite 1500 as a template and initially excluded all dividend gems that were already established. 1,361 companies remained. As a further criterion, only corporations with a market capitalization of more than 8 billion US dollars were included, which reduced the number to 463 companies. It then excluded companies that are not currently paying dividends or have had a dividend yield of less than 1 percent over the past five years. Finally, those companies were excluded that, according to FactSet, have not continuously increased their dividends. Of the 1,500 companies considered, only 122 remained that met all of these criteria and therefore potentially have what it takes to become Dividend Aristocrats.

These companies are at the top of the list

But even among the companies that made it onto the list, there are big differences in performance compared to the development over the past five years. In first place, the agricultural machinery provider Tractor Supply made it with the highest five-year compound annual growth rate (CAGR) of the annual dividend of a whopping 30.71 percent. And that’s despite the fact that the dividend yield was just 1.68 percent five years ago and is currently 1.79 percent. A long-term investment would have been very worthwhile here.

MSCI ranks second among the Future Dividend Aristocrats with a five-year dividend CAGR of 29.43 percent, while Lam Research comes in third with 28.1 percent. Other companies that made the final list include Monolithic Power System, CDW Corp., Masco Corp., Pool Corp., Broadcom, Raymon James Financial and Owens Corning. However, as MarketWatch points out, being on this list is no guarantee that an investment in any of the companies will be successful over the long term. Further research into the company to be considered for an investment is still necessary. Nevertheless, the investigation of the news portal makes it clear that the annual increase in the dividend can be an investment criterion that pays off for investors in the long term.

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