Any dividend growth investors will have at least a look at the US dividend aristocrats with their track record of 25+ years of consecutive dividend increases. Currently 57 S&P 500 companies are part of the dividend aristocrats list. Next to the “real” aristocrats with 25 years of dividend increase, there are several companies that will reach this status in the coming year(s). Who are those “to be” Dividend Aristocrats?
S&P’s Dividend aristocrats rules
Some dividend rules have to be taken into account. S&P 500 applies the following criteria to construct the Dividend Aristocrats list:
- must be members of the S&P 500
- must have increased dividends every year for at least 25 consecutive years
- Market Cap at least USD 3 billion
- Liquidity at least USD 5 million (average daily value traded)
- Diversification, at least 40 constituents and not sector allocation above 30%
Furthermore, the following “Index Maintenance” rules apply:
The index’s constituent membership is reviewed once a year, with changes effective after the close of the last business day of January. The reference date for such additions and deletions is after the close of the last business day of December.Quarterly Re-weighting.
Index constituents are re-weighted to equal weight quarterly, effective after the close of the last business day of January, April, July, and October. The reference date for such re-weightings is five business days prior to the last business day of the re-weighting month.
No additions are made to the index between annual reconstitutions, except for qualifying spin-offs as detailed below.
Constituents deleted from the S&P 500 are removed from the index simultaneously.
Monthly Dividend Review
S&P Dow Jones Indices reviews index constituents on a monthly basis. If S&P Dow Jones Indices determines that an index constituent has eliminated or suspended its dividend, omitted a payment, or reduced its calendar year dividend amount and will no longer qualify for the index at the subsequent reconstitution, it will be removed from the index effective prior to the open of the first business day of the following month and not replaced until the following reconstitution.
See eu.spindices.com/… Index Maintenance
Future dividend aristocrats
Taking the above (maintenance) rules into account, there are several companies that will reach this status in the coming year(s). Since quality dividend stocks come often at a high-price it is worthwhile to have the future dividend aristocrats already on your radar and consider a “buy the dips” approach. Below are the dividend stocks to watch.
Realty Income (O)
Realty Income (O) was founded in 1969 and is one of the largest REITs in America. The company owns more than 5,600 properties located in 49 states and leases its buildings to 260 commercial tenants operating in 48 diverse industries. In 2019 Realty reached an uninterrupted dividend streak of 25 years and a market cap of US$24.574b
Realty Income announced in September a monthly dividend of $0.227/share, which is a 0.2% increase from prior dividend of $0.2265. Realty Income’s earnings grew by 15.6% over the past year and analysts forecast that earnings growth will remain stable around 15%.
Realty Income is a reliable monthly dividend stock for conservative investors seeking a blend of current income and moderate but dependable payout growth. Given the current dividend yield of 3.5% and a 3-years dividend growth rate of 5%.
TJX Companies (TJX)
TJX Companies (TJX) has grown into the world’s largest off-price retailer, selling deeply discounted brand name and designer fashions. It operates through four segments: Marmaxx, HomeGoods, TJX Canada, and TJX International. Prices are generally 20% to 60% below department and specialty stores’ regular prices. Although challenged by e-commerce/Internet retail, TJX has proven to be one of the most adaptable retailers in the world. In 2019, TJX declared a $0.23/share quarterly dividend, which is an 18% increase from the prior dividend of $0.195.
TJX has paid uninterrupted dividends for 23 years in a row. Its current dividend yield of 1.54% is about in line with its 5-year average of 1.44%. With its reasonably low payout ratio (34.4%), TJX’s dividend payments are well covered by earnings. TJX is certainly a dividend stock to consider for the long-term.
NextEra Energy (NEE)
NextEra Energy, Inc., generates, transmits, distributes, and sells electric power to retail and wholesale customers in North America. NextEra Energy has two main business segments:
- Florida Power & Light (70% of sales)
- NextEra Energy Resources (30% of sales)
The company has a long track record of delivering value to its shareholders and has an uninterrupted dividend streak of 24 years.
Over the past year, NEE has paid out 58% of its earnings as a dividend. This is a reasonably safe payout ratio for utility stocks.
NEE’s current dividend yield of 2.13% is 22% below its 5-year average of 2.75%. Also given the forward P/E ratio of 28.0 which is well above its 5-year average of 20.8, the stock could be overvalued. The dividend growth rate is around 15%.
NextEra Energy does not offer as high dividend yield compared to its peers, but its long-term dividend growth rate is 2-3 times as fast. So, as a potential dividend aristocrat interesting for portfolios of low-risk US investors.
Ross Stores (ROST)
Ross Stores, Inc., operating under the brand name Ross Dress for Less, is an American chain of discount department stores headquartered in Dublin, California. As of October 14, 2019, it operated approximately 1,811 off-price apparel and home fashion stores in 39 states. The company was founded in 1982. ROST reached this year a dividend streak of 25 years of consecutive increases.
The current dividend yield is low with 0.90%. Over the past year, ROST has paid out only 22% of its earnings as a dividend. This is a safe and healthy payout ratio for consumer retailers. The last 5 years the dividend growth was 21% per year which is very fast.
ROST’s dividend yield is not exciting, but the dividend is considered to be (very) safe and has an interesting growth rate. The total return is still impressive as the chart shows below.
Below the 3-years total return of the 4 future dividend aristocrats in one chart.