Income investors oftentimes want reliable payouts from their investments, and that makes a lot of sense. Some income investors rely on the cash flow their investments provide in order to finance their expenses, such as retirees. Other income investors that are still in the accumulation phase nevertheless want a reliable income stream, as it helps them stomach bear markets better and as it allows for ongoing dividend reinvestment to increase one’s holdings over time.
Reliable income is thus a good goal to have, but reliable income growth is even better. The Dividend Aristocrats are a group of stocks that have managed to grow their dividends by at least 25 years in a row, some of them have done so for 30, 40, or even 50 years.
The ability of these companies to raise their dividends in good times and in bad times, during recessions, market crashes, and during the COVID pandemic, speaks for their high quality. These companies are not able to raise the dividend every year thanks to flaky results — instead, they are able to raise the dividend like clockwork thanks to their high average quality.
Sufficient balance sheet strength, wide moats, defensive business models with above-average recession resilience, and strong management teams are some of the key points that many of the Dividend Aristocrats share, which allows them to keep their dividend growth records intact even during dark times. In this report, we’ll highlight three Dividend Aristocrats that offer compelling dividend yields of at least 4%, making for an attractive combination of current income and income growth potential.
1. 3M Company
3M Company (MMM) is a diversified technology company that produces and sells a wide range of products, including personal safety equipment, packaging material and solutions, industrial goods such as abrasives and tapes, electrical equipment, and so on. In total, 3M sells more than 60,000 products, which makes for very diversified operations.
Even when the company loses market share in one area, that doesn’t hurt the company too much overall, as more than enough other products can make up for it. This explains why the company has shown compelling resilience versus economic downturns in the past, which is an important factor for its ability to raise the dividend so reliably.
3M’s wide and diversified product portfolio also means that success with a single new product does not lift the company-wide growth rate too much, which is why growth generally isn’t extraordinary at 3M. That is not needed, though, as even a somewhat unspectacular mid-single-digit growth rate can lead to compelling total returns when combined with a strong dividend yield.
According to our estimates, 3M Company will grow its earnings-per-share by 5% annually going forward. When we combine that with a dividend that yields 4.1% at current prices, total returns of close to 10% are quite achievable. In fact, even before potential multiple expansion tailwinds, 3M could deliver ~9% annual returns in the long run. Since we also forecast some multiple expansion, total returns could easily rise above 10% annually over the coming years, which makes the company an attractive choice at current prices according to our models.
2. Leggett & Platt
Leggett & Platt (LEG) is an engineered products company that primarily sells furniture, store equipment, and some industrial products. Leggett & Platt has raised its dividend for 50 years in a row, making it not only a Dividend Aristocrat but a Dividend King on top of that.
Even though the furniture business can be somewhat cyclical and dependent on macroeconomic conditions, the company has proven that it is able to make up for any short-term earnings shortfalls (such as during the Great Recession) by accessing balance sheet reserves. This allows the company to pay a steadily rising dividend no matter what.
During the recession, Leggett & Platt initially saw its earnings decline compared to pre-crisis levels, as store closures hurt its ability to sell furniture to consumers. Nevertheless, the company recovered quickly, and generated new record profits in 2021, proving that pandemic-related headwinds were temporary only.
The company offers a dividend yield of 4.5% at current prices, which allows investors to generate attractive income from this reliable dividend grower. Our estimates see Leggett & Platt grow its earnings-per-share by 5% a year going forward. Combined with the high initial dividend yield, high single digit annual returns should thus be very achievable.
Once we factor in potential tailwinds from multiple expansion, as we believe that Leggett & Platt is trading around 10% below fair value today, double-digit annual returns in the coming years seem like a realistic goal, we believe.
3. Walgreens Boots Alliance
Walgreens Boots Alliance (WBA) is a leading pharmacy company in the US as well as in Europe. Demand for pharmaceutical goods naturally is not very cyclical, and pharmacies also were deemed essential during the pandemic, which allowed them to continue to operate their stores. This combination makes for a resilient business model that is not hit hard by external shocks such as recessions or other macro crises.
Walgreens Boots Alliance has more than doubled its earnings-per-share over the last decade, proving that the company can generate considerable earnings growth despite the fact that it does not benefit much from economic growth overall. But due to macro tailwinds such as growing healthcare expenditures in many countries with aging populations, its growth is not bad at all.
We do believe that Walgreens Boots Alliance will be able to deliver mid-single digit earnings growth in the coming years as well, stemming from some organic growth and buybacks that will lift the company’s earnings-per-share growth rate above its net income growth rate.
At current prices, Walgreens Boots Alliance offers a dividend yield of 4.5%, following a 20% share price decline over the last year. This, in combination with a reasonable earnings growth outlook that will allow for ongoing dividend growth at a solid pace, should allow Walgreens to generate total returns in the high single digits range, before factoring in tailwinds from multiple expansion.
Since we believe that Walgreens Boots Alliance trades around 20% below fair value today, as the company is valued at less than 9x this year’s expected profit, our total return estimate is even higher than 10%, as we factor in some multiple expansion gains on top of the compelling dividend yield and earnings-per-share growth. All in all, Walgreen Boots Alliance thus looks like a compelling income and total return pick at current prices.