If someone said “I have this high-yielding investment with a 10% yield,” would you buy it?
Given the possibility of a looming recession, it's natural for retail investors to pivot away from popular names toward high-yield alternatives. However, retail investors (present company included) often fall into the trap of buying high but unsustainable yields, leaving them with portfolios worth a fraction of what they started with.
So, how do we avoid that trap?
Dave McGarel, Chief Investment Officer of First Trust Portfolios L.P., has some valuable thoughts on the matter. “When investing in dividend stocks, profitability, consistent annual increases in dividends, and low dividend payout ratios are more important than a high yield.", says McGarel.
“A high payout ratio along with a high dividend yield,” he elaborates, “is often a signal that the market believes the dividend is unsustainable. This is especially true if a company does not have a high quality balance sheet or is in a very cyclical business where slower growth or a recession may cause a dividend reduction or elimination for a company to survive.”
Now, let's say we apply that advice to the Dividend Aristocrats, companies with 25+ years of increased dividends (among other stringent criteria). Then, you can improve your chances of getting a genuinely sound dividend stock for the long term. So, let’s do just that.
How I Came Up With The Following Stocks
Like always, I started with the Barchart Stock Screener. For this analysis, I used the following filters:
- Watchlists: Aristocrats. I have several watchlists on Barchart that make it easy for me to lock onto specific industries or stock types. It’s also very easy to use; all you need to do is create a watchlist and type in or copy and paste your relevant ticker symbols and they’ll be added immediately. You can also do them one at a time or in bulk.
- Dividend Payout Ratio: 25% to 60%. The dividend payout ratio expresses how much a company’s after-tax earnings are used to pay dividends to shareholders. Experts agree that the sweet spot for the payout ratio is around 25% to 60%. This means the company is giving back a significant portion of their earnings to shareholders while still retaining enough money to reinvest in itself.
- Current Analyst Ratings: 4.5 to 5 (Strong Buy).
- Annual Dividend Yield: Left blank.
With these filters set, I ran the screen and got 27 results, which I arranged from highest to lowest yields.
And now, I'll talk about the top three, starting with number one:
Target Corp (TGT)
First high-yielding Dividend Aristocrat to buy is Target, one of the biggest retailers in the US. The company offers various products, including apparel, home goods, electronics, and groceries. It emphasizes a more curated shopping experience with its high-quality products and exclusive brand deals while still keeping things affordable.
TGT stock has a relatively low 49.92% dividend payout ratio, which means it can increase its dividends without any issues. Speaking of increases, the company has a 53-year dividend increase streak and currently pays $4.48 annually, which translates to a 4.29% yield based on the stock's current trading price.
However, it’s important to note that the ongoing trade war has analysts jittery about retail stocks. As such, analysts rate TGT stock a moderate buy.
Exxon Mobil Corp (XOM)
Exxon Mobil Corporation is one of the world's largest publicly traded energy companies. Its focus is on the exploration, production, refining, and distribution of oil, natural gas, and petrochemicals. Exxon Mobil operates globally, supplying energy to various industries while investing in carbon capture, hydrogen, and other low-emission technologies to support a transition toward cleaner energy.
The company has increased dividends for 42 consecutive years, keeps payout ratios low at 47.87%, and pays $3.96 annually, reflecting a 3.64% yield. Meanwhile, XOM stock has a moderate buy rating based on 25 analysts, suggesting they see room for growth in this high-yielding Dividend Aristocrat.
Genuine Parts Company (GPC)
Capping off our list of highest-yielding Dividend Aristocrats to buy is Genuine Parts Company, a global distributor of automotive and industrial replacement parts, best known for its NAPA Auto Parts brand. It supplies a wide range of products to repair shops, retailers, and industrial businesses through an expansive global logistics and supply network.
With a 48.84% dividend payout ratio, Genuine Parts is well positioned to continue increasing its dividends over the long run. It also has the longest increase streak on this list at 69 consecutive years - since the company went public in 1948. Meanwhile, the company recently increased its dividend $4.12 - a 3.45% yield based on the stock's current trading prices. Now that’s providing shareholder value.
Final Thoughts
High-yielding Dividend Aristocrats with safe payout ratios offer a high chance increasing income - which is especially important during uncertain times like today. However, while these companies present favorable yields and secure long-term income now, things can always change. So, always do your due diligence and keep your eye out for new developments.
