Dividends form the bedrock of wealth creation when coupled with sustainable growth. In the vast expanse of the market, Dividend Aristocrats embody a rare breed of stocks. To join this exclusive club, members of the S&P 500 index must consistently raise their dividend payouts annually for 25 years or more. Currently, there exist a mere 68 Dividend Aristocrats, a testament to the stringent criteria demanded for entry.
However, earning a spot among this elite cohort does not guarantee automatic investment value. History bears witness to the fact that Dividend Aristocrats are not immune to pruning their payouts. For instance, Walgreens Boots Alliance (NASDAQ: WBA) faced expulsion last year due to a dividend reduction. Speculations loom over 3M (NYSE: MMM) possibly following suit.
Investors must scrutinize the sustainability of these dividends, particularly the company’s ability to generate sufficient free cash flow (FCF) to support payouts. Furthermore, Dividend Aristocrats boasting high growth rates ought to exhibit a parallel trajectory in rising FCF to validate an investment-worthy status.
Lowe’s (LOW) Reigns Supreme
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Home improvement giant Lowe’s (NYSE: LOW) stands tall among the Dividend Aristocrats boasting the most impressive growth rates. With a 10-year compounded annual growth rate (CAGR) of 18.3%, LOW showcases a remarkable feat for a company that has consistently elevated its dividends over a span exceeding six decades.
While some investors might overlook LOW due to its seemingly modest 1.8% yield, such dismissal would be misguided. Evident from the dividend growth, payouts have surged from a meager 68 cents a decade ago to $4.30 per share presently. Consequently, the yield on cost has experienced a meteoric rise as well, reflecting the prudent investment yield on shares acquired earlier.
Over the past decade, Lowe’s has demonstrated substantial annual FCF growth of nearly 10%, underscoring its robust financial health to sustain dividend payments. Noteworthy is LOW’s FCF payout ratio, typically hovering within the 20% to 30% range, indicative of ample scope for future growth prospects.
Roper Technologies (ROP): Unveiling a Tech-Infused Transformation
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Over the last decade, Roper Technologies (NYSE: ROP) underwent a radical metamorphosis. Initially a manufacturer focused on fluid handling equipment, industrial controls, and analytical instrumentation, a strategic shift propelled it towards the realm of technology. Rebranded as Roper Technologies in 2015, the company now stands as a pioneering force in application software, network software, and tech-enabled products, positioning itself as a hidden gem in the tech sector.
ROP’s 10-year dividend CAGR stands impressively at 14.1%, aligning with its strategic vision of acquiring niche, asset-light businesses harboring cutting-edge technologies. Evidenced by its sturdy FCF generation rate of 10% annually over the past decade, the company’s asset-light approach enables it to compound cash flows, ultimately creating enduring value for shareholders. Notably, an investment of $10,000 in Roper Technologies back in 2013 would now amount to a considerable $42,580, outshining returns compared to a similar investment in the broader S&P 500, yielding just above $33,000 today.
AbbVie (ABBV): A Pharmaceutical Titan’s Ascension
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Pharmaceutical giant AbbVie (NYSE: ABBV) secured entry into the esteemed Dividend Aristocrats league through a unique backdoor access. An offshoot from Abbott Labs (NYSE: ABT) roughly a decade ago, AbbVie inherited the illustrious dividend legacy of its former parent, leveraging the historical prestige for its intergenerational credit.
Despite the eyebrow-raising lineage, AbbVie has proven its mettle in upholding the aristocratic standards. Demonstrating a steadfast commitment to dividend growth, ABBV has consistently raised its payout by over 14% annually for the past decade. Remarkably, the company’s FCF production boasts a comparable 14% CAGR over the same period. Illustratively, AbbVie’s FCF exceeded $22 billion last year, with dividend payments amounting to $10.5 billion, maintaining a consistent payout ratio around 50% in line with its 10-year performance history.
Investors harboring ABBV stock can repose in the assurance that the dividend remains secure, poised for an enduring legacy of future incrementals.
On the publication date, Rich Duprey held a LONG position in LOW, ABBV, WBA, and MMM stock. The opinions expressed in this article are solely those of the author, adhering to the InvestorPlace.com Publishing Guidelines.
