Buying dividend aristocrats is a reasonable strategy for those investors seeking long-term income. The equities in this group have paid increasing dividends for the past 25+ years, so they will likely continue to provide passive income for the foreseeable future.
It’s a pretty select group, consisting of 68 publicly traded companies, all of which are in the S&P 500. So, that’s arguably the 68 best firms among the 500 largest publicly traded companies in the United States.
But we’re being even more selective here. I’d argue favor investing in dividend aristocrats within three sectors: energy, consumer staples, and healthcare. These are widely predicted to be the best-performing sectors this year, and a strong argument for that case remains.
|WST||West Pharmaceutical Services||$363.34|
Chevron (NYSE:CVX) is one of two energy stocks counted among this list of top dividend aristocrats. Indeed, the energy sector was the sole sector of the 11 that constitute the stock market to record positive returns in 2022. Record prices at the pump led to even greater profits at the oil majors.
But as investors know, past performance does not guarantee future results. This year began with prices at the pump similar to prices a year earlier. Those prices are now rising, not to 2022 levels yet, but growing nonetheless. This should bode well for Chevron from a profitability standpoint in 2023.
Higher profitability will undoubtedly lead to higher share buybacks and dividend payments over time, because that’s how oil majors satisfy investors. Chevron bumped its quarterly dividend up from $1.42 to $1.51 recently. Investors should expect at least $6.04 of income from each share of CVX stock this year, and more over time.
Exxon Mobil (XOM)
Exxon Mobil (NYSE:XOM) had a tremendous 2022, which saw the firm record Q3 profits rivaling that of Apple (NASDAQ:AAPL). That stark comparison shows how well energy performed and how much tech fell in 2022. The company’s $114.2 billion in profits was a near 78% increase year-over-year.
But that’s been the story for Exxon Mobil over the past few years. Indeed, 2021 was no different from a profitability standpoint, despite Covid-related concerns, which hampered the stock to some degree.
That said, 2023 has brought a number of powerful catalysts to the fore for Exxon Mobil. Recent surprise OPEC output cuts in early April is the latest catalyst. That cut changes price dynamics globally, resulting in rising prices at the pump, which sat at $3.44 a month ago but have since risen to $3.68. And that benefits XOM stock directly.
Currently, XOM stock pays investors a dividend yield of roughly 3%. That’s a reasonably healthy return, and a minimum payout for the company. In any case, I think this dividend should be stable over time, because even if Exxon’s payout ratio rises, the company will continue to pay its dividend until all other options are exhausted.
NextEra Energy (NEE)
NextEra Energy (NYSE:NEE) is another energy stock, but one which is unrelated to oil. The company operates two businesses – a utility and a renewable energy business. The utility business, Florida Power & Light Company, is the largest utility in the U.S. The renewables business, NextEra Energy Resources, is the most significant wind and solar energy generator globally.
That scale and leading presence across two distinct business lines make NextEra Energy a popular, investment-worthy stock in general. The increasing likelihood of a recession later this year makes utility stocks more attractive, since people pay for their lights and electricity before everything else. And renewables remain a likely secular winner, as the U.S. pivots away from fossil fuels en masse.
The positive news for investors is that NEE stock still has a significant upside based on its target price. It also recently increased its dividend and hasn’t reduced it since 1995.
How much income should investors in Coca-Cola (NYSE:KO) stock expect? In the short term, the answer is $1.84 for each share owned in 2023. That’s almost certainly the answer this year, given the company’s predictable dividend history. It’s a relatively modest long-term income source yielding less than 3%.
But the beauty of Coca-Cola is its predictability. And not only in the predictability of its dividend. But also in the predictability of its stable share price.
KO stock boasts a beta of 0.55, indicating it sees roughly half the daily move of the overall stock market. What investors miss in terms of rapid upward price swings is made up for in gentler price declines. That’s particularly attractive in times like these, when investors don’t know what to expect.
Therefore, Coca-Cola isn’t a particular exciting stock. However, the company does provide reliably-growing revenues and earnings that translate into a steadily increasing investment overall. It’s also translated into a stock that’s more than doubled in value over the past ten years, even without considering its dividend.
Walmart (NYSE:WMT) won’t release its subsequent earnings until mid-May, but we can still make some optimistic assumptions. One, it will continue to grow and remain the most prominent retailer globally. The next closest retailer, Amazon (NASDAQ:AMZN) has no chance of closing the gap anytime soon. Two, Walmart is likely to benefit from solid tailwinds throughout this year.
It’s good to be the biggest retailer in any economic environment. But it’s terrific to be at Walmart right now. It isn’t surprising that Walmart sees an uptick in business in economic downturns. The company sells discount items for decades. But Walmart is also seeing a new cohort of consumers that it hasn’t seen historically – higher-income shoppers frequent Walmart more than they have in the past.
That’s a strong signal, given that consumers across the income spectrum are pinched. If a recession begins, perhaps an even higher income cohort will begin to trickle into Walmart. Time will tell.
West Pharmaceutical Services (WST)
West Pharmaceutical Services (NYSE:WST) offers a lot to like for investors seeking long-term income from their portfolio. The only clear knock on this stock is that it pays a minimal dividend yielding 0.2%. That said, it will still provide long-term income, which is likely to increase, given it was last reduced in 1985.
Despite that small dividend, West Pharmaceutical Services is part of a healthcare sector that traditionally weathers economic downturns well. Investors recently were reminded of that truism when the pandemic struck. The company is expected to see top-line growth in 2023 with an expected $2.95 billion in sales. It recorded $2.89 billion in sales in 2022.
Wall Street analysts believe WST stock is currently overpriced by about $15. Gurufocus, a metrics-heavy analysis site, pegs the stock’s value at around $392 per share. I’m inclined to think the stock likely has more upside here, given its strong profitability metrics and growth profile.
Cardinal Health (CAH)
Investors aren’t likely to go wrong with Cardinal Health (NYSE:CAH). It offers the same general strength that West Pharmaceutical Services does as a stalwart in the healthcare sector.
However, CAH stock also offers a dividend yielding more than 10-times what WST stock does. That’s not particularly important for the sake of this long-term income argument. That said, the fact that Cardinal Health hasn’t reduced its dividend since 1988 is essential. This almost guarantees long-term income in the future.
A stable dividend is critical in judging whether one can expect positive returns overall. The other factor is share price appreciation. Cardinal Health shares have provided an average annual return of 9.15% over the past decade. That is more than double the return of the average stock listed on the New York Stock Exchange over the same period. That means that CAH investors received a 2.4-times the average return on their investment over that period, suggesting current investors might have a winner in CAH stock.
On the date of publication, Alex Sirois did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.