The Dividend Aristocrats are considered to be some of the most safe dividend stocks,
each with at least 25 years of consecutive dividend growth.
This reliable history entices many investors, but it’s important to remember not all Dividend
Aristocrats are created equal.
In today's video, I’m going to explain which types of dividend aristocrats stocks you should
avoid buying.
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Alright, so now I’m going to share the logic of which dividend aristocrats to avoid and
provide specific stock examples.
In my opinion, the worst dividend aristocrats are those who offer a low dividend yield and
very low growth.
These types of companies often have low growth of earnings as well.
I’ll share 4 stocks that fit this category.
First, there is Walmart, ticker symbol WMT.
This is by far the highest quality company I will be sharing today.
Walmart stock has a current 1.49% dividend yield.
The stock trades at a premium valuation with a PE over 35.
With this, you would expect to see a company growing at a high rate.
However, Walmart stock has actually seen next to no earnings and dividend growth over the
past decade.
The 10 year compound annual growth rate of the dividend is only 1.95%.
That is terrible.
On top of this, both net income and free cash flow per share have seen no growth at all.
Again, not good.
Real profit growth at Walmart has slowed down dramatically.
The Walmart dividend payout ratio is around 50%.
Outside of dividends, they are returning capital to shareholders via a consistent share buyback
program.
In fact, Walmart is buying back around 1-3% of their shares every year.
That increases the relative value of each share you own.
Even with that financial engineering, Walmart is not growing their earnings per share.
Growth has been non-existent in every metric other than top-line revenue.
Somehow, Walmart stock has seen a very large stock price increase over the past 5 years.
With the premium valuation and low growth, it’s hard for me to imagine Walmart stock
matching these returns in the future.
Then you add in the low dividend yield and growth, and I can’t come up with a compelling
reason to buy Walmart stock at current prices.
There are far better options available elsewhere in the stock market.
Maybe the company could see stronger growth in the future, but only time will tell.
Another stock which fit’s this archetype is Colgate-Palmolive, ticker symbol CL.
Colgate has a current dividend yield of 2.53%.
Once again, the stock trades at a premium valuation and has seen a decade of little
to no growth.
Colgate’s dividend has a 2.71% five year compound annual growth rate.
This low growth has outpaced earnings growth, shooting the dividend payout ratio up to around
90%.
This is on both free cash flow and net income.
Free cash flow per share has seen negative growth over the past decade.
Excluding this recent 30% decline, growth is basically flat.
Colgate is a quality business, but there is no growth to be found.
It baffles me why it would trade at such a high valuation.
Why would you buy Colgate stock in today’s market?
I’m going to provide 2 more examples of stocks which fit this category and then share
a bonus dividend aristocrat stock I’d avoid, but for a different reason.
Pentair, ticker symbol PNR, is a water solutions company based in the UK.
The current dividend yield is 1.49%.
Earnings growth has declined over the past decade.
The company is considered a dividend aristocrat, as they have continued growing their dividend
based on the UK currency.
However, the GBP has declined in value significantly relative to the USD.
So as an American investor, the value of their dividends have declined over the past decade.
Recent growth has still been slow at a 4.68% 5 year CAGR.
That is not very high.
Now, I’m going to share the highest yield example of this category.
Consolidated Edison, ticker symbol ED, is a regulated electric utility with a current
dividend yield of 3.47%.
While the yield is slightly higher, dividend growth is very slow.
The 10 year dividend CAGR is 2.79%.
This is not likely to ever accelerate to higher levels.
The earning power of the company has barely grown in this time.
On top of this, shareholders are constantly being diluted as the company issues more shares.
ED stock is a reliable dividend payer, but why would you want to own it relative to your
other options available.
Finally, I’m going to share another dividend aristocrat stock to avoid, but this time for
a different reason.
Stanley Black & Decker, ticker symbol SWK has a current dividend yield of 3.78%.
The stock price has fallen dramatically over the past 2 years as the company's earnings
have collapsed.
They are now negative and still declining more.
Fundamentally, a decline in earning power like this puts the company's dividend payment
at risk.
The payout ratio is very unsustainable at current levels.
Despite this, the latest dividend increase was 1.27%.
Perhaps, they continue to grow it, but we do not know at this time.
Buying SWK stock right now is an extremely risky turnaround play.
You definitely need to do deep research into the business and identify the probability
earnings will return to prior levels.
In general, I try to avoid these types of companies.
Once again, there are far better relative options available in the stock market.
So these are 5 examples of Dividend Aristocrat Stocks To Avoid.
If you want to learn more, check out my new video where I analyze all 68 dividend aristocrat
stocks as of 2023.
This will be linked at the end of the video and in the description.
If you found this analysis valuable, you can sign up for DividendData.com to track your
portfolio and research stocks just like me.
There you will gain access to the exact tool I used throughout the video to help identify
worrying financial trends in these companies.
If the software helps you discover just 1 slightly better stock, then it pays for itself.
Thanks for watching!