Dividend Aristocrats: The Stocks You Need in Your Portfolio Now

Marc Lichtenfeld
by Marc Lichtenfeld, Chief Income Strategist, The Oxford Club

The Stocks You Need in Your Portfolio Now

by Marc Lichtenfeld, Investment U Senior Analyst

Wednesday, August 10, 2011: Issue #1575

The recipe for panic in the markets is astonishingly simple.

Start with 500 or so politicians who would prefer to act like six year olds rather than leaders. Then add a few knuckleheads at a ratings agency who believe the credit of the United States is riskier than subprime loans made to low-income workers. The result is a vicious market sell-off.

Things aren’t good right now. There’s real fear (for good reason) of recession. The U.S. government is failing to inspire much confidence. Europe is even worse.

But, this isn’t 2008, when there was a bona fide crisis. It’s rough today, but it isn’t time to pull out of the markets. In 2008, there was a very real chance that our entire financial system might collapse. A severe depression seemed inevitable. Today, we’re probably looking at a run-of-the-mill recession. Painful? No doubt. But not something that’s likely to take down the whole system.

So what’s an investor to do?

I’m not an advocate of blindly buying stocks into a downturn. You need a strategy. And history has shown that through the years, owning quality dividend paying stocks is the way to come out ahead over the long term.

Finding Attractive Yields in Strong, Cheap Companies

Today, you can buy stocks at a significant discount from their price just two weeks ago.

At the end of July, the yield on the S&P 500 fell below 1.9 percent. Today, it’s around 2.2 percent. That’s a huge jump in yield in just two weeks. Of course, that’s because the S&P tanked nearly 17 percent during that time.

For long-term income seekers, this is a terrific opportunity to pick some attractive yields in strong companies currently on the cheap.

In the past, I’ve written about my affinity for dividend aristocrats. These companies have a 25-year history of raising their dividends each and every year. They’ve seen market sell-offs like this before. They’ve seen recessions, wars, terrorist attacks, sky-high inflation… But they continue to boost the dividend year after year.

For example, Abbott Laboratories (NYSE: ABT) has a healthy 3.8-percent dividend yield. It’s been raising its dividend for more than 25 years. In 2011, shareholders got a nine-percent increase in their dividend. Not too many people around the country are getting nine-percent pay raises these days. Yet, shareholders of Abbott Labs are.

And Abbott has plenty of room for more increases. Over the last four quarters, the company generated $9.2 billion in cash from operations, while it paid $2.7 billion in dividends, giving it a payout ratio of just 29 percent. So even if things turn south for the company’s business, the dividend is very safe.

The Power of Investing in Dividend Aristocrats

To show you how powerful these dividend aristocrats can be, consider the following scenario...

  • Let’s assume a weak stock market and Abbott Labs’ share price goes absolutely nowhere in the next 10 years. An investor who buys 200 shares today at $48.69 will put approximately $9,700 to work.

  • If the investor reinvests the dividend every quarter and the dividend continues to grow at nine percent per year (the average growth rate is actually higher over the past five years), at the end of 10 years, the investment would be worth over $17,600, or more than 80 percent – in a stock that remained flat.

  • And if the stock grows at an eight-percent annual clip, a little less than the S&P 500’s historical average, you wind up with over $29,000, or triple your money.

Another great dividend aristocrat is Genuine Parts (NYSE: GPC). This boring auto replacement parts company has been raising its dividend each year since 1956! It currently pays a 3.6-percent yield.

In 2011, it raised its dividend by 9.8 percent.

If the markets rebound, there will be lots of good stocks to buy, including those named above, as well as other aristocrats.

But since no one can time the market and most people should have exposure to equities, dividend aristocrats are a safer way of ensuring that your wealth continues to build, even if the market goes nowhere for years to come.

Good investing,

Marc Lichtenfeld

comments powered by Disqus