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3 Dividend Aristocrats Suited Perfectly for Income Investors

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Investing for income is a popular strategy that market participants use while constructing a portfolio. After all, who doesn’t enjoy getting paid?

During times of overall market weakness, an income stream helps alleviate drawdowns within positions. A vast majority of companies residing within the S&P 500 distribute dividends, displaying that they are well-established with solid financials and successful business models.

Dividend Aristocrats are companies that not only consistently pay a dividend to investors but also increase the size of their payout annually.

To be ranked as a Dividend Aristocrat, a company must increase its dividend for 25 consecutive years. Additionally, the company must also be a member of the S&P 500.

Dividend Aristocrats are generally large companies that are no longer seeing accelerated growth, and many enjoy steady profits in the face of good and bad economic situations.

Three Dividend Aristocrats – Caterpillar (CAT - Free Report) , Johnson & Johnson (JNJ - Free Report) , and Coca-Cola (KO - Free Report) – have all enjoyed solid share performance year-to-date. The chart below illustrates the year-to-date performance of all three companies while blending in the S&P 500 as a benchmark.

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All three companies’ shares have had a positive return throughout 2022, further nailing in the fact that these companies can weather nearly any storm. Let’s get into why these companies are stellar bets for income investors.

Johnson & Johnson

Johnson & Johnson (JNJ - Free Report) is an American multinational corporation that develops medical devices, pharmaceuticals, and consumer packaged goods. Headquartered in New Jersey, JNJ has been around since 1886.

JNJ has increased its dividend for 60 consecutive years, making it not just a Dividend Aristocrat but a Dividend King as well – Dividend Kings have raised dividends for at least 50 straight years. Being considered a Dividend King puts JNJ in an elite group of companies.

The company’s dividend yield is 2.5%, with a payout ratio sitting sustainable at 43% of earnings. Additionally, the company has a five-year annualized dividend growth rate of a notable 5.8%. Johnson & Johnson’s yield is much higher than the S&P 500’s.

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JNJ has attractive valuation levels, as well. Its current forward earnings multiple of 17.3X is well below 2020 highs of 20.2X and just marginally above its five-year median of 17.0X. Furthermore, the value represents a slight 3% discount relative to the S&P 500’s value of 17.9X.

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The company also has a favorable debt profile. JNJ’s debt/capital ratio was reported at 27.9% as of March 2022, lower than the 28.8% value in December 2021. Furthermore, the ratio has come down from 31.7% in FY18. Generally, a lower ratio means less financial risk.

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Coca-Cola Company

The Coca-Cola Company (KO - Free Report) is an American multinational beverage corporation primarily known for its flagship Coca-Cola drink. The company manufactures, sells, and markets other non-alcoholic drinks.

Like JNJ, Coca-Cola is also a Dividend King on top of being a Dividend Aristocrat – the company has increased its dividend for a jaw-dropping 60 consecutive years, putting it in elite company.

Coca-Cola’s annual dividend yield sits at 2.8%, with a payout ratio sitting at 73% of earnings. Additionally, the company has a solid five-year annualized dividend growth rate of 3.09%, and the dividend yield is much higher than that of the S&P 500.

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KO sports a somewhat pricey forward earnings multiple of 25.5X, but the current value is well below 2020 highs of 29.1X and is just marginally above the five-year median of 24.3X. Shares trade at a 43% premium relative to the S&P 500.

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Free cash flow growth has been something to note as well. Free cash flow was reported at $11.3 billion in FY21, a 28% increase from FY20. Additionally, free cash flow has grown 67% since FY18.

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Caterpillar

Caterpillar (CAT - Free Report) is the world’s largest construction-equipment manufacturer. The company designs, develops, engineers, manufactures, markets, and sells machinery, engines, financial products, and insurance to customers.

CAT has increased its dividend in 28 consecutive years, meeting the requirement to be a Dividend Aristocrat. Unlike KO and JNJ, the company has some ground to cover before joining the elite Dividend King group.

The company rewards its shareholders via a 1.9% annual dividend yield with a payout ratio sitting sustainably at 41% of earnings. Additionally, the company has a notable 9.2% five-year annualized dividend growth rate. 

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CAT’s forward earnings multiple resides at 18.2X, nowhere near 2020 highs of 33.6X, and just marginally above its median of 17.7X over the last five years. The value represents a slight 2% premium relative to the S&P 500’s forward P/E ratio of 17.9X.

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Book value per share has been steadily increasing for the company, climbing nearly 31% from 2018 to the latest reported value of $32.10 per share in March 2022.

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Bottom Line

Investing for income is always a solid strategy deployed within the market. When companies consistently increase their dividend payouts, it’s generally a sign of robust financial health and successful business operations.

All three names above are Dividend Aristocrats, meaning that the companies have increased their dividend payout for at least 25 consecutive years. Two companies - Coca-Cola and Johnson & Johnson - are Dividend Kings as well, reflecting 50+ years of increased dividend payouts.

For investors looking to add a solid stream of income that you can bet on, paired with solid market returns, all three companies above would be stellar places to start.


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Caterpillar Inc. (CAT) - free report >>

CocaCola Company (The) (KO) - free report >>

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