We believe the best way to build long-term wealth is through buying great dividend stocks, reinvesting dividends, and holding them for long periods. This strategy has been time tested and proven over the decades to help investors compound their wealth, and it’s why we focus on finding the best dividend stocks to own.
There are thousands of dividend stocks across the world, so choosing the best ones can seem like a difficult task. However, we can narrow the search down by starting with proven winners, such as the Dividend Aristocrats.
This is a group of S&P 500 components that all have at least 25 consecutive years of dividend increases, and in this article, we’ll make the case for the Dividend Aristocrats, as well as highlight three we like today.
Why Dividend Aristocrats?
There are just 65 Dividend Aristocrats, which shows how difficult it is for a company to reach the quarter-century milestone. These companies, therefore, are truly among the best when it comes to dividend longevity. In addition, many of them offer high rates of dividend growth, which is a virtuous combination that can help long-term investors compound their wealth more quickly, and boost their yield on cost significantly over time.
In our search for dividend growth stocks to buy, starting with the Dividend Aristocrats helps focus only on stocks that are recession resistant, have management teams that are willing and able to return ever-higher amounts of cash to shareholders, and have the competitive positioning necessary to consistently grow earnings over long periods of time. The Dividend Aristocrats exhibit these qualities, and it’s why we often start there to find great stocks.
Now, let’s take a look at three Dividend Aristocrats we like today.
Pentair plc (PNR)
Our first stock is Pentair, which is a water solutions company that operates through two segments: Consumer Solutions, and Industrial & Flow Technologies. Through these segments, Pentair produces a wide variety of pumps, pool equipment, filters, heaters, water treatment products, irrigation, crop spray, beverage solutions, fluid transfer and much more.
Pentair was founded in 1966 and has grown to a global footprint that generates over $4 billion in annual revenue. The stock has a market cap of $8 billion today, and Pentair has an extremely impressive dividend growth streak of 45 years.
The stock’s current yield is 1.7%, which is just ahead of the broader market. However, the growth potential for Pentair’s dividend is outstanding.
First, the payout ratio is 22% of this year’s earnings. That means that not only is the dividend extremely safe, it also means the company could quite easily raise the dividend over and above the rate of earnings growth.
The average dividend increase in the past five years has been just under 5%, which is roughly equal to our estimated earnings growth rate of 6% annually for the foreseeable future. This combination of strong growth potential, an extremely low payout ratio, and a management team that values returning cash to shareholders makes Pentair a highly attractive dividend growth stock for the long-term.
Target Corporation (TGT)
Our next stock is Target, the ubiquitous general merchandise retailer with the highly recognizable bullseye log. Target offers thousands of products through its stores, some of which are sourced from suppliers, and some of which are private label. Through its 2,000 stores, Target sells perishables, dry groceries, frozen items, apparel and accessories, home décor, toys, beauty and household products, and more.
Target traces its roots to 1902, generates about $110 billion in annual revenue, and trades with a market cap of $73 billion. Target’s streak of dividend increases stands at 54, which is all the more impressive given the inherent cyclicality of retail. However, the company has stood the test of time over the decades, and has one of the best dividend increase streaks in the market today.
Target’s current yield is up to 2.3%, which is actually decently high by its standards. For the past few years, the stock has yielded between 1.5% and 2.0%, so on this measure, it looks somewhat undervalued.
Like Pentair, Target has a very low payout ratio. It is set to be just 34% of earnings this year despite the fact that the company’s average increase in the past decade is in excess of 10%. That puts Target in rare company in terms of outright dividend growth, but its impressive earnings growth has afforded it the ability to continue to do so for many years to come.
We see 8% earnings growth for the foreseeable future, and similar levels of dividend growth. That should make Target a truly outstanding dividend growth with its longevity, market-beating yield, and strong growth.
PPG Industries (PPG)
Our final stock is PPG, a company that manufactures and distributes paints, coatings, and other specialty materials globally. Through its two segments – Performance Coatings and Industrial Coatings – PPG offers a wide array of paints, coatings, solvents, adhesives, sealants, and finishes for a wide variety of end user applications in various industries.
The company was founded in 1883, and has since grown to more than $18 billion in annual revenue, as well as a $28 billion market cap.
PPG’s most recent dividend increase brings its streak to 51 years, putting it in the same exclusive group as Target in terms of dividend longevity. Like Target, PPG’s sector is inherently volatile, as coatings tend to ebb and flow with the economic cycle. Still, the company’s dividend has continued to rise, with its average increase over the past decade at about 8%.
The yield today is right at 2.0%, but that’s about as high as it has been in the past decade. And given the payout ratio is just 33% of earnings for this year, we see many years of strong dividend growth ahead. That’s especially true considering we forecast 8% earnings growth in the years to come, so PPG can quite easily raise its dividend at strong rates without undue stress on its ability to pay the dividend.
Final Thoughts
While there are many strategies aimed at building long-term wealth, we find the best path to be buying high-quality dividend growth stocks, reinvesting dividends, and holding for long periods. The Dividend Aristocrats is a list that is full of great dividend stocks, and we like Pentair, Target, and PPG from that list as dividend growth buys today. All offer very low payout ratios, robust growth prospects, and strong histories of dividend growth.
