Dividend Aristocrats are some of the world’s most popular stocks. Having outperformed the S&P 500 since 1991, they are also very high-quality stocks. While you might attribute this outperformance to survivorship bias (stocks that miss a dividend are removed from the index), some research suggests that companies that get kicked off the Dividend Aristocrats list perform even better than the “survivors.” If that is the case, then the Aristocrats beating the S&P 500 by 2% is nothing short of amazing.
The conventional definition of a dividend aristocrat is a stock with 25 consecutive years of dividend increases. Most of these stocks are U.S. based, but there are a few Canadian Aristocrats, too. There is a “Canadian Aristocrat” category with softer criteria (just five years of hikes), but most Canadian investors I’ve spoken to think of Aristocrats as stocks with 25 consecutive years of hikes.
Accordingly, I will share five Aristocrats that meet the “25-year” standard: two Canadian and three foreign.
CN Railway
Canadian National Railway (TSX: CNR) is a Canadian Dividend Aristocrat that meets the “U.S.” criterion for a Dividend Aristocrat, with 27 consecutive years of dividend hikes under its belt.
CN Railway has performed extremely well over the years. In the span of 24 years, it has risen 2,800% in price, and delivered significant dividends along the way. Its historical earnings growth has been strong, with earnings up 17% per year over the last three years. It also grew its earnings 6% in the last 12 months, despite revenue declining. Railroads suffered negative revenue growth in 2023, likely due to lower fees for crude by rail compared to the “hot” 2022 period. CN’s revenue decline was less severe than its peers’.
In addition to the respectable long-term growth, CN Railway also has outrageously good profitability metrics, with a 33% net income margin, a 15% free cash flow margin, and a 27% return on equity. I owned this stock in the past, and I’d be happy to own it again today.
Fortis
Fortis (TSX: FTS) is a Canadian utility that is not only a Dividend Aristocrat but also a Dividend King, having raised its dividend every year for the last 50 years. Fortis stock has a 4.4% yield at today’s prices, which means it has more near-term income potential than CNR does. CNR’s dividend-growth rate has been higher than FTS’s, so it might well deliver more dividends than Fortis over, say, a 20-year period. Nevertheless, Fortis can produce more dividend income today.
How has Fortis managed to grow its dividend so much? Like most utilities, it enjoys fairly stable, “recession-resistant” revenue. Unlike some other utilities, however, it hasn’t neglected growth. Instead, it has invested in expansion, buying up utilities across Canada, the U.S., and the Caribbean. Another virtue it has is a relatively modest amount of debt. It has $27 billion in long term debt to $24 billion in total equity, which gives it a 1.125 debt-to-equity ratio. By utility standards, that’s next to nothing!
Non-Canadian aristocrats
Having shared my top two Canadian dividend Aristocrats, I can now proceed to some global names that I think have a lot of potential:
- Johnson & Johnson: A pharmaceutical giant with 61 years of dividend growth. The company boasts extremely high earnings growth (over 12-month, three-year and five-year time frames), and an absurdly high 45% net margin.
- Coca-Cola: A soda company with 61 years of dividend growth with a 23% net income margin and a 44% return on equity.
- S&P Global: Would you believe that the publisher of the Dividend Aristocrats index is itself a Dividend Aristocrat with 50 consecutive years of hikes? It also boasts a stunning 36% free cash flow margin, although its growth has been underwhelming.
Any one of these three stocks is worth looking into. Combined with the two TSX stocks above, we have the beginnings of a true Dividend Aristocrat portfolio here (five stocks is 20% of the 25 stock minimum the Motley Fool recommends).
Happy dividend collecting!
