What is the best dividend stock?
It was a question my grandfather pondered back in the mid-1970s, as he considered buying a stock to help fund his retirement.
Ultimately, he settled on Exxon Mobil (NYSE: XOM).
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Now, I wasn’t privy to his thought process or analysis. But I’ve got to imagine that the company’s healthy dividend, growing payments and longstanding profitability gave him confidence.
In fact, he was SO confident in Exxon that he broke the rule of diversification and invested ALL of this capital in just this one stock. This was the company founded by John D. Rockefeller. And if it was good enough for Rockefeller, then it was good enough for a salesman from New Jersey
From 1975 to 1990, Exxon shares delivered 13,887% gains. That’s enough to turn a small $500 investment into $7,443 (BEFORE factoring in the dividends).
Royalty: The Best Dividend Stocks
Exxon is one of the rare breed of stocks known as Dividend Aristocrats.
These are companies that pay a dividend and have increased their dividend payment for at least 25 consecutive years.
A small group of just 10% of companies in the S&P 500 meet the mark, making them the royalty of dividend stocks.
What makes them so special? And why do we care about the longevity of the dividend growth?
Dividend Yield vs. Dividend Growth
Most folks consider dividend stocks based upon the current yield.
For example, Exxon currently pays a $3.08 annualized dividend ($0.77 per quarter, multiplied by four). Divide that by the recent share price of $83, and we arrive at a 3.7% dividend yield. Own 100 shares of Exxon, and you’ll collect $308 in annual income (or $77 every 3 months).
Current yield is important. It tells you what you can expect to get paid TODAY. But it doesn’t do a great job at forecasting long-term returns.
To understand the potential future gains, we look at the dividend growth rate. That’s because stock prices are highly correlated with dividend growth over the long term.
Going back to the example of Exxon, let’s look at the dividend and share price over the last 30 years.
Notice the correlation between the dividend growth and share price.
The quarterly dividend payments grew by 516% during this 30-year period. And the share price similarly gained 555%.
Over short periods of time, there can be a divergence between dividend growth and share prices. For example, during a bear market, the dividend may increase and the share price could decline. And during a bull market, the share price may rise faster than the dividend grows.
But over long periods of time – such as this 30-year period – we see surprisingly high correlations between dividend growth and share price appreciation.
This is not unique to Exxon stock. This is common with ALL dividend aristocrats.
Over the last 10 years, the S&P 500 has delivered annual returns of 7.34%. Yet that number has been topped by the S&P 500 Dividend Aristocrats (NYSE: NOBL) with annualized gains of 10.74%. The following chart from S&P shows the performance.
Many investors would benefit from simply owning a Dividend Aristocrats ETF. Others prefer to hand pick individual Dividend Aristocrats. Most of the companies that make the cut are well known companies that are household names.
Dividend Aristocrats are a great place to invest for the long-term. In fact, the S&P 500 Dividend Aristocrats (NYSE: NOBL) ETF is probably a good replacement for owning the entire S&P 500 index.
One little-known dividend strategy could be handing you huge 12.8% dividends every 21 days. Even more rare than Dividend Aristocrats, a tiny group of companies regularly issues special payouts.
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Best Dividend Stocks: Full List
Here is the FULL list of the S&P 500 Dividend Aristocrats.
Here’s a full list of the current S&P 500 Dividend Aristocrats as of Oct. 16, 2017.
- 3M Co. (MMM)
- AFLAC Inc. (AFL)
- AbbVie Inc. (ABBV)
- Abbott Laboratories (ABT)
- Air Products & Chemicals (APD)
- Archer-Daniels-Midland (ADM)
- AT&T (T)
- Automatic Data Processing (ADP)
- Becton Dickinson (BDX)
- Brown-Forman (Class B shares BF/B)
- Cardinal Health (CAH)
- Chevron (CVX)
- Cincinnati Financial (CINF)
- Cintas (CTAS)
- The Clorox Co. (CLX)
- Coca-Cola (KO)
- Colgate-Palmolive (CL)
- Consolidated Edison (ED)
- Dover (DOV)
- Ecolab (ECL)
- Emerson Electric (EMR)
- Exxon Mobil (XOM)
- Federal Realty Investment Trust (FRT)
- Franklin Resources (BEN)
- General Dynamics (GD)
- Genuine Parts (GPC)
- W. W. Grainger (GWW)
- Hormel Foods (HRL)
- Illinois Tool Works (ITW)
- Johnson & Johnson (JNJ)
- Kimberly-Clark (KMB)
- Leggett & Platt (LEG)
- Lowe’s Companies (LOW)
- McCormick & Company (MKC)
- McDonald’s (MCD)
- Medtronic (MDT)
- Nucor (NUE)
- PPG Industries (PPG)
- PepsiCo (PEP)
- Pentair (PNR)
- Procter & Gamble (PG)
- S&P Global (formerly McGraw Hill Financial, Inc. SPGI)
- Sherwin-Williams (SHW)
- Stanley Black & Decker (SWK)
- Sysco (SYY)
- T. Rowe Price (TROW)
- Target Corp. (TGT)
- VF Corp. (VFC)
- Wal-Mart Stores (WMT)
- Walgreen Boots Alliance (WBA)