3 Dividend Aristocrats for Maximum Dividend Safety - Cabot Wealth Network

3 Dividend Aristocrats for Maximum Dividend Safety

Written by Bob Ciura for Sure Dividend

A focus area for many income investors is dividend safety — and rightfully so. After all, investing in a stock that cuts its dividend leads to lower income and usually a steep share-price decline.

The Dividend Aristocrats as a group offer a high level of dividend safety, proven by their dividend growth track records of at least 25 years. There are, however, Dividend Aristocrats that stand out even relative to their dividend-raising peers due to the excellent resilience that their business models provide.

In this report, we’ll highlight three of the best Dividend Aristocrats from a dividend safety perspective.

1: McDonald’s (MCD)

McDonald’s is the largest restaurant company in the world and has managed to raise its dividend for 46 years in a row.

Founded in 1940, McDonald’s has expanded to a massive global corporation over the decades, currently operating more than 40,000 restaurants in more than 100 different countries (including franchised restaurants).

McDonald’s business model of providing a range of standardized products to consumers, ranging from very inexpensive value meals to somewhat more expensive, provides for a restaurant experience where all kinds of consumers are willing to spend their money.

Demand for food naturally is not cyclical, and even during a recession, consumers do not reduce their spending at fast-food restaurants meaningfully, whereas more traditional sitdown restaurants feel a larger impact from an economic downturn.

Thanks to new restaurant openings in international markets, coupled with comparable sales growth, rising margins, and share repurchases, McDonald’s is well-positioned to see its earnings-per-share rise over the coming years and in the long run.

The days when MCD generates extraordinary growth are over, as the already very large size of the corporation makes maintaining high growth rates extremely hard, but we do believe that there is a good chance for earnings-per-share to grow at a mid-single-digit rate in the long run, which is, we believe, solid for a low-risk income investment such as McDonald’s.

Thanks to a beta of just 0.60, shares typically do not decline as much as the broad market in case of an equity market downturn, making McDonald’s a safe investment from an income and a volatility perspective.

2: Walmart (WMT)

Walmart is a leading brick and mortar, and, increasingly, an omnichannel retailer that has provided excellent total returns for its investors in the past. Walmart has raised its dividend for 48 years in a row, nearly making the company a Dividend King.

Walmart has seen its comparable store sales grow very reliably in the US in the past, even during economic downturns, and also during the current pandemic. Due to the product lineup including many essential items, and thanks to the fact that Walmart is widely regarded as a place to shop for value, consumers do not scale back their shopping at Walmart during times of crisis.

In fact, when recessions result in declining average income, some consumers that do normally shop at other venues tend to shift some of their shopping trips to Walmart due to the chain’s inexpensive prices. Walmart has, not surprisingly, performed well during past recessions and other times of crisis, and at the same time, Walmart’s stock isn’t very volatile.

Walmart stock’s beta is just 0.53, which is why its stock tends to outperform during equity market downturns, generally declining by just around 5% for every 10% drop in the broad market.

Walmart is not a high-growth corporation, but investors can still expect some earnings-per-share growth in the long run. Thanks to a combination of growth in Walmart’s e-commerce business, acquisitions, and same-store sales growth, Walmart should be able to deliver top-line growth of 2%-3% a year.

Combining that with some earnings-per-share growth tailwinds stemming from share repurchases gets us to a 5% earnings-per-share growth estimate over the coming years — not spectacular, but sold for a very low-risk investment.

3: Clorox (CLX)

The Clorox Company is our third pick for a very safe dividend. Like McDonald’s and Walmart, it has raised its dividend for more than 40 years in a row (44 to be precise), but unlike these two giants, it is a significantly smaller company. Clorox trades with a market capitalization of around $20 billion today.

The consumer staples company sells products such as cleaning products, plastic storage containers, personal hygiene products, and food items such as salad dressings.

All of these products have one thing in common–demand for them is not cyclical. Whether the economy is in a strong spot or not, consumers and businesses require a steady supply of cleaning products, trash bags, and all of the other products that Clorox sells in the US and internationally.

Most of the company’s products are the number 1 or 2 brand by revenue in their respective category, which helps make Clorox even less risky, as strong brand recognition makes consumers stick with Clorox’s brands.

Since demand for Clorox’s products isn’t cyclical, the company naturally also doesn’t benefit from strong economic growth, as consumers don’t really increase their spending in these product categories during good times. Clorox is thus not among the “reopening” stocks for a post-pandemic recovery.

Still, with some international growth, some price increases, and some margin expansion potential, Clorox is able to generate some earnings-per-share growth, and that will likely be the case in the future, too.

With Clorox making tuck-in acquisitions from time to time, we do believe that the company has the potential to generate 5%-6% annual earnings-per-share growth in the long run, which is relatively on par with the growth that we expect from McDonald’s and Walmart.

Clorox has the least volatile shares among these three companies, as the stock’s very low beta of just 0.18 suggests that shares would decline only very slightly even in a major bear market. There is no guarantee for that, of course, but if history is a guide, then an investment in Clorox has the potential to provide some stability during times of crisis while offering a very safe dividend yielding 2.5% at the same time.


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