When I'm looking for reliable income stocks, my favorite starting point is the Dividend Aristocrats Index that Standard & Poor's updates every year. To make this list, companies must have increased dividends for at least 25 consecutive years. This is a major accomplishment and only a select few stocks make the cut. Think about it -- these are stocks that consistently grow dividends despite wars, recessions, oil shocks and real-estate meltdowns.
Dividend Aristocrat stocks include some of the best known companies in America: Wal-Mart (NYSE: WMT), Johnson & Johnson (NYSE: JNJ), Proctor & Gamble (NYSE: PG) and Exxon Mobil (NYSE: XOM) are all names that appear on the list. These are companies with well-known brands and other competitive advantages that allow them to grow through good times and bad.
In addition to consistently growing dividends, the Dividend Aristocrat stocks often outperform the S&P 500. Last year, Dividend Aristocrat stocks returned 19.4%, which was more than four percentage points better than the 15.1% return of the S&P 500. In the past three years, returns on Dividend Aristocrat stocks averaged 5.7%, far superior to the S&P 500's negative 2.9% return.
Only 42 companies made the Dividend Aristocrats list in 2011. Three names were deleted this year for failing to raise dividends, and three new companies were added that achieved the 25 consecutive-year milestone. The new names were packaged food companies McCormick (NYSE: MKC) and Hormel Foods (NYSE: HRL), along with Ecolab (NYSE: ECL), which makes cleaning products.
Of course, not all Dividend Aristocrat stocks are equally attractive. Some look better than others, either because of higher yield or faster dividend growth. I screened the 2011 list for the highest-yielding dividend aristocrat stocks.
Here are the top five names...
1. CenturyLink (NYSE: CTL)
Projected Forward Yield: 7%
CenturyLink (formerly known as CenturyTel) is a telecommunications provider of voice, networking and Internet access services. Dividend growth for this stock has been exceptional, growing 64% in the past five years.
Like most telecoms, CenturyLink generates enormous amounts of cash flow, and dividend payout from cash flow is conservative at 36%. CenturyLink, the fifth largest phone company in the United States, expects to acquire Qwest Communications (NYSE: Q), the third largest, in April in a stock deal valued at more than $10 billion.
2. Pitney Bowes (NYSE: PBI)
Yield: 6%
Pitney Bowes sells mail processing equipment in the United States and internationally. This company's dividend growth has been steady, but unimpressive at just 3% in the past five years. Earnings had been falling, which pushed dividend payout nearly to 100%. However, Pitney Bowes recorded better-than-expected profits in the fourth quarter of 2010 and analysts expect this company to return to moderate growth in 2011.
3. Consolidated Edison (NYSE: ED)
Yield: 5%
Consolidated Edison is an electric and gas utility serving more than 3 million customers in New York City and surrounding areas. Although the 69% dividend payout rate for this company leaves plenty of room for growth, it has been sluggish, growing only 1% in the past five years. Consolidated Edison benefited from record deliveries of natural gas to its East Coast customers this winter, but the utility's long-term growth is pegged at a modest 3-4% a year.
4. Cincinnati Financial Corp. (Nasdaq: CINF)
Yield: 5%
At one time, financial stocks were well-represented on the Dividend Aristocrats Index, but many fell from the list after cutting dividends during the credit crisis. Cincinnati Financial is one of the few standouts that continued to raise dividends. This Midwestern property and casualty insurer has boosted dividends nearly 6% in the past five years and about 4% in the last three years. Cincinnati posted a 32% gain in operating profits in 2010 and analysts target long-term growth at 10% a year.
5. Leggett & Platt (NYSE: LEG)
Yield: 5%
This diversified manufacturer is no household name, but most of us sleep in beds that use a Leggett-built box spring or shop in stores that display products on Leggett shelving. Leggett generates strong cash flow and keeps payout from cash flow very conservative at less than 30%. This company's dividend growth of 11% in the past five years has been better than average, and the economic recovery is improving its business outlook. Leggett is forecast to grow 15% each year for the next five years.
Action to take--> My favorite Dividend Aristocrat stock for conservative investors is Leggett & Platt. This proven performer combines above-average dividend growth with conservative payout and improving business prospects.
My top pick for more aggressive portfolios is CenturyLink. This telecom has a track record for exceptional dividend growth. While increased capital spending will reduce CenturyLink's free cash flow this year, its pending merger with Qwest creates opportunities for sizable cost savings that could boost future profits and dividends.
Lisa Springer
P.S. -- I don't know if you've seen this or not, but a Texas man has figured out how to collect thousands of dollars a month in dividend payments alone. Last year he made $41,161 this way. Whether you’re on a fixed income or not, I’m sure you could benefit by copying this man’s formula for your own use. Here’s everything you need to know…
Disclosure: Neither Lisa Springer nor StreetAuthority, LLC hold positions in any securities mentioned in this article.
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