Dividend GrowthDividend aristocrats are companies in the S&P 500 Index that have managed to raise their dividend payments for at least the last 25 consecutive years. We identified 10 of these high quality companies that offer investors a starting dividend yield of 3%. Some have paid dividends for more than 100 years!


Not surprisingly, dividend aristocrats are mostly large cap, blue chip stocks that have proven to be some of the most durable businesses that money can buy. That’s one reason why we own some of them in our Top 20 Dividend Stocks portfolio.


Consistent dividend increases are often signs of a strong business that is enjoying steady earnings growth. Paying out dividends to shareholders also signals management’s confidence in the future profitability of the company.


For these reasons and more, the S&P Dividend Aristocrats Index has outperformed the S&P 500 Index by 2.9% per year over the last 10 years. It’s no wonder why many income investors prefer to invest in dividend aristocrats that can reliably pay them more and more income each year.


However, not all dividend aristocrats offer an attractive dividend yield. Of the 51 companies that comprise the complete list of dividend aristocrats today, only 12 have a dividend yield of at least 3%.


We sorted through these companies to pick the 10 dividend aristocrats that appear to offer some of the safest dividend yields in excess of 3%.


1. Walmart (WMT)

Walmart’s stock has a dividend yield of 3.3% and trades at about 13x forward earnings estimates.


While the stock has been weak due to rising labor costs and intense competition from e-commerce rivals such as Amazon AMZN, Walmart’s core advantages remain largely intact. The company generated over $480 billion in sales during fiscal 2015. Such massive scale allows the company to squeeze suppliers and maintain its position as the everyday low-price leader in the brick-and-mortar retail market.


Walmart’s sales mix is also very durable. It generates over half of its revenue from grocery items, which are more resistant to swings in the economy than many other types of products and provide the company with predictable cash flow.


The company’s dividend is also very secure. Over the trailing twelve months, Walmart’s earnings payout ratio was a healthy 42%, leaving plenty of cushion and room for future dividend growth regardless of trends in earnings.


From a dividend growth perspective, Walmart’s dividend compounded at a 13% annualized rate over the last decade. However, the company’s increases slowed to 2% in each of the last two years. You can read our analysis on Walmart by clicking here.


2. Consolidated Edison (ED)

Consolidated Edison, known by consumers as ConEd, has a dividend yield of 4.3% and trade at about 15x forward earnings estimates.


The company is an electric and gas utility holding company with major operations in New York, New Jersey, and Pennsylvania. Regulated utilities typically offer some of the safest dividends that income investors can find because their cash flows are so predictable.


ConEd’s regions have historically had a supportive regulatory environment, and the company maintains a strong credit rating. These factors have allowed it to raise its dividend for over 40 straight years. However, dividend growth has averaged in the low single-digits over the last decade.


For these reasons, utilities such as ConEd are best for investors most concerned with preserving their capital and receiving a predictable income stream.


3. Archer Daniels Midland (ADM)

Archer Daniels Midland offers investors a 3.1% dividend yield and trades at approximately 13x forward earnings estimates.


The company is a large player in the agricultural services industry, processing commodities such as corn and oilseeds into products for food, animal feed, chemical, and energy uses around the world.


Archer Daniels Midland is sensitive to movements in commodity prices, which explains why the stock trades near its 52 week low price, but its core business has very high barriers to entry. The company has the largest grain terminal and shipping network in the country and maintains hundreds of processing plants and storage facilities around the world. Replicating this logistical network would be extremely costly and require substantial know-how.


Despite softness in crop prices and oil prices weighing on revenue growth and profitability, particularly within the company’s ethanol division, the dividend appears to be in great shape.


The company’s earnings payout ratio over the trailing twelve months is a healthy 39%, even despite recent macro headwinds. Dividend growth has been solid as well, growing more than 10% per year over the last 5- and 10-year periods. Check out our full analysis of ADM by clicking here.


4. McDonald’s (MCD)

McDonald’s stock has a dividend yield of 3.1% and trades at 23.3x forward earnings estimates.


The company is a leading player in the fast food industry with one of the strongest brands and real estate portfolios in the business. The company’s growth has struggled for the last couple of years as the menu over expanded and consumers’ tastes changed, but McDonald’s most recent earnings report showed signs of a U.S. turnaround taking place.


Over the last twelve months, McDonald’s payout ratio sits at 74%, which provides less wiggle room for dividend growth compared to some other stocks. However, the company most recently raised the dividend by 5% and should be a reliable cash flow generator for years to come.


5. Coca-Cola (KO)

Coca-Cola has a dividend yield of 3.1% and trades at 21.5x forward earnings estimates.


The company is one of the most well-known blue chip dividend stocks with dividend payments dating back to 1893. Coca-Cola has some of the most iconic brands in the world and maintains number one value share in 25 of the top 32 global beverage markets. Brand strength is reinforced by the company’s advertising spending, which came in at a whopping $3.5 billion in fiscal 2014. The company’s massive distribution network and stronghold in emerging markets will also help it continue to grow as it introduces more non-sparkling beverages.


Looking closer at Coca-Cola’s dividend, its free cash flow payout ratio over the trailing twelve months is about 66%. For a company as stable as Coca-Cola, this is a very safe level. The company’s dividend has compounded at a high single-digit rate over the last decade, and we would expect solid dividend growth to continue.


6. Nucor (NUE)

Nucor’s stock yields 3.6% and trades at about 23.6x forward earnings estimates.


The company is the largest minimill steel manufacturer in the United States. Nucor has some sensitivity to steel prices and cheaper steel imports from Chinese competitors, but its low-cost positioning, variable cost operating model, and diverse product lines help mitigate these risks. To this point, the company has generated positive free cash flow in nine of the last ten years, including 2008 and 2009. Should the economy start to rebound, Nucor would be a strong beneficiary.


Nucor has paid dividends since the early 1970s and has increased its dividend for more than 40 straight years. The company’s earnings payout ratio over the trailing twelve months is 76%, but harsh macro headwinds have limited dividend growth in recent years to minimal increases. Until macro headwinds abate, we would expect dividend growth to remain low.


7. Procter & Gamble (PG)

Procter & Gamble, known as P&G by many consumers, trades at about 20x forward earnings estimates and has a dividend yield of 3.5%.


The company sells branded consumer packaged goods across more than 180 countries. Its biggest brands are Pampers (13% of sales), Tide (6%), and Head & Shoulders (4%). In total, the company has over 20 billion-dollar plus brands, almost all of which hold the #1 or #2 position in their category or segment.


P&G is able to maintain its strong market positions by investing $2 billion annually in research and development, conducting thousands of research studies to improve consumer understanding and develop appropriate new technologies. Its marketing campaigns then create a loyal following of consumers for its brands.


Approximately 60% of P&G’s free cash flow has been used to pay its dividend over the trailing twelve months, providing plenty of safety and room for growth. The company’s dividend has compounded at a mid single-digit annual rate over the last five years. Check out our analysis of P&G by clicking here.


8. AT&T (T)

AT&T’s stock yields 5.7% and trades at 12.5x forward earnings, reflecting the company’s low growth rate.


The company is a leading provider of wireless, pay-TV, and broadband telecommunications services in the United States and Mexico. AT&T recently closed its $49 billion purchase of DirecTV to become the largest pay-TV company in the United States and seeks to drive faster growth by bundling its various services together. The massive size of AT&T’s subscriber base, costly network infrastructure, and significant spectrum create formidable barriers to entry and result in consistent free cash flow generation.


The company’s dividend growth has averaged 2% in recent years, reflecting the mature nature of AT&T’s industry and the company’s 73% free cash flow payout ratio over the last twelve months.


9. Target (TGT)

Target trades at 15.2x forward earnings estimates and has a dividend yield of 3.1%.


Target is a large consumer retailer that offers its customers everyday essentials and fashionable, differentiated merchandise at discounted prices. While the company has a much smaller grocery business than Walmart, it follows a similar value strategy that has helped make its business a bit less resistant to swings in the economy. Its products will always be in demand, and the company’s mature store base has generated positive free cash flow in nine of the last ten years.


The company has recorded the highest dividend growth rate of any stock on this list, compounding its dividend at a 20% annual rate over the last decade. With a free cash flow payout ratio of just 33% over the last twelve months, Target has plenty of room for continued dividend growth.


10. HCP Inc (HCP)

HCP offers investors a 6.4% dividend yield and trades at 18.3x fiscal 2016 earnings estimates.


HCP is a health care real estate investment trust. These businesses must pay out almost all of their earnings as dividends but typically generate solid cash flows because of their long-term lease contracts and typically high occupancy rates. HCP’s portfolio is also diversified between senior housing, life sciences, nursing, hospitals, and medical office buildings, further insulating cash flows. We expect the company to benefit as the population ages and demographics continue shifting in its favor.


The company’s dividend has recorded low single-digit growth over the last decade. Using consensus estimates for HCP’s fiscal 2015 funds from operations, the company’s payout ratio is 72%. We expect continued low single-digit growth ahead, but the stock’s high yield might be attractive for investors living off dividends in retirement.

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