Dividend Aristocrats are the most revered stocks among income investors. But you’ve probably never heard of some of them. Here are four relative unknowns that truly stand out.
When you think about how difficult it is to actually get a company off the ground, it’s amazing any company ever survives.
That some companies actually pay shareholders every year is even more mind-boggling. Nevertheless, some companies have managed to not only pay their shareholders a dividend for 25 straight years, but also raised their payouts every year.
The notion sounds impossible. It isn’t.
The trick to consistent dividend growth comes to down to management’s ability to grow a business while generating enough free cash flow to repeatedly reward shareholders in higher increments. Those companies are called “Dividend Aristocrats” — companies that have raised their dividends every year for at least 25 straight years.
Let’s take a look at four Dividend Aristocrats that would make great additions to your long-term portfolio, and what they all have in common. You’ll be surprised at some of these names. They aren’t the big blue chips you might expect, which is why you should always cast a wide net when searching for investment ideas.
Illinois Tool Works (NYSE: ITW) is a great American success story that just passed its 100th anniversary in 2012. The company operates in a sector that I love – it makes things that fix other things, because other things are always breaking. Tools are what build things and what fix them and that’s why ITW has been so successful.
The company offers tools across seven sectors: automotive, electronics, food equipment, fluids, welding, construction and specialty products. With 100 years of experience, Illinois Tool Works has had plenty of time to build out a massive distribution network and partner with independent distributors.
The reason ITW stock is paying a 2.1% yield (or $1.94 per share), and has done so for 50 years, is cash flow. Its operating cash flow keeps rising while capital expenditures remain consistent year after year. Its dividend payout ratio is about 33%, meaning a third of its FCF is paid as dividends.
Ever heard of Universal Corporation (NYSE: UVV)? Probably not, but it has been around since 1888 and has paid a dividend every year since 1972. The dividend is presently a very generous 4.9%, or $2.08 per share.
How can a relatively unknown company afford to pay so much? Because it does business in an industry that has constant demand: tobacco.
Fortunately, Universal does not come with the same risk of the cigarette makers because all it does is procure, process, pack and ship the actual tobacco leaves. That generates all the cash flow the company needs to pay its dividend, although recent write-offs in inventories and accounts receivable may make it seem like things are shakier than they are at the venerable company.
But I have no worries about dividend safety with such a popular product, especially since it just made a deal with Philip Morris International (NYSE: PM) to supply tobacco.
Old Republic International (NYSE: ORI) handles another boring product: insurance. It’s also been around since 1888, and pays a generous dividend yield of 4.8%. That dividend has been paid since 1982.
Insurance companies are great places to find dividend stocks. The whole business model is designed to take in more money in premiums than it pays in claims. Underwriting is getting increasingly complex and accurate, and so all that extra premium money has to go somewhere. Insurance companies usually throw it back to shareholders.
That, by the way, is a great way to lower your insurance rates. Buy the stock of the company you insure with and let their dividend pay your premium.
The final selection has been paying dividends and raising them every year since 1986. It too operates in a really boring arena: regional banking. Tompkins Financial (NYSE: TMP) couldn’t have a more boring name, but what a great cash flow model it has: it’s a bank!
Tompkins Financial spends almost nothing on capex, less than $7.5 million per year, yet generates fees from all its services so that it pumps out $60-80 million in operating cash flow every year. It then turns around and pays out less than a third of it to shareholders, for a yield of 3.4%. or $1.68 per share.
TMP’s net income isn’t overly impressive, but that’s not why you invest in the stock. You go with a regional bank because it tends to have regional loyalty from its customers. Tompkins Financial has regular and reliable cash flow that is paid out to investors. The rest is used to expand.
By now, you’ve guessed the common themes among these surprising Dividend Aristocrats are that they’re all boring businesses that cash flow really well. Keep that in mind as you search for future dividend growers.
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