Buy This, Not That: Dividend Aristocrats

By TradeSmith Research Team

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The graph below shows the increase in Google searches for the phrase “stock dividend” from the start of 2004 to October 2022.

Source: Google Trends

There was a surge in searches for information about dividend stocks during the start of the pandemic in March 2020, and while search interest has gone through peaks and valleys since then, it’s still higher than it was before February 2020. That’s because people seek out safe-haven investments during times of uncertainty, and with the current state of high inflation, rising interest rates, a slowing housing market, elections, wars, and plenty of other things to keep everyone up at night, a company that can pay you a quarterly or even monthly dividend provides a feeling of reliability and security.

If you dig a little deeper within those dividend-paying stocks, there’s an elite class called the Dividend Aristocrats.

Not any old dividend stock will make the cut. To qualify as a Dividend Aristocrat, a company must:
  • Be a part of the S&P 500 — a symbol of prestige because investors use the S&P 500 as a benchmark for the health of the overall stock market.
  • Pay and raise its dividend for 25 straight years — a sign of commitment from the company as well as financial health.
  • Have a minimum market cap of $3 billion — a sign that a company has an established business with a long operating history.
  • Have average daily trading volumes of at least $5 million — ensuring that there are people who would want to buy your shares if a time comes when you’d want to sell them.
If a regular dividend stock offers a feeling of security, Dividend Aristocrats offer that feeling on overdrive.

And with our Health Indicator, we can get even more granular and tell you which are considered “buy now” stocks and which are considered stocks to avoid.

In this edition of TradeSmith’s Buy This, Not That, we’ll share three Dividend Aristocrats in our Green Zone and three in our Red Zone, plus a snapshot of each company.

I’ll let the team take it away from here.

Enjoy your Wednesday – Keith Kaplan, CEO, TradeSmith

Buy This

CompanyTickerDividend Yield as of 10/25/2002Health Indicator
Genuine Parts Co.GPC2.21%Green Zone
PepsiCo Inc.PEP2.66%Green Zone
Aflac Inc.AFL2.62%Green Zone

Buy This Dividend Aristocrat Snapshot, No. 1: Genuine Parts Co. (GPC)

In a time when folks are pinching every penny and possibly delaying major purchases, Genuine Parts Co. stands to benefit with its car maintenance supplies and auto repair services.

Having a functioning vehicle is nonnegotiable for most people, so rather than forking over thousands of dollars for a new ride when issues pop up, many people will resort to fixing what they already have.

NAPA Auto Parts is one of Genuine Parts’ most well-known brands, offering everything from motor oil to seat covers to floor mats.

GPC also has more than 25,000 global repair center partnerships, including 19,500 NAPA North American AutoCare Centers.

While the S&P 500 has dropped over 20% this year, GPC has gone in the opposite direction, climbing over 20%. GPC shareholders have fared well in 2022 during a tough economic time, which is important to know as a forward-looking investor if we were to enter a recession.

Buy This Dividend Aristocrat Snapshot, No. 2: PepsiCo Inc. (PEP)

In addition to being a Dividend Aristocrat, PEP is a sterling example of what Senior Analyst Mike Burnick calls a “money never sleeps” stock.

“Money never sleeps for PEP shareholders because every minute of every day, 365 days a year, somebody, somewhere in the world, is buying a bag of Ruffles, Fritos, or Doritos chips. And they are reaching for an ice-cold Pepsi or Mountain Dew to wash it down with. YOU as a shareholder get a little piece of every sale in the form of growing dividends,” Mike says.

Known for its soda and snack brands, PepsiCo has also been working on selling healthier food and beverage options to reach a broader audience.

By 2025, the company plans to have reduced sugar in its beverage portfolio and reduced sodium and saturated fat in its food portfolio.

Buy This Dividend Aristocrat Snapshot, No. 3: Aflac Inc. (AFL)

When folks are looking to cut costs, they aren’t looking to cut a necessity, like home or auto insurance.

Homeowner’s insurance can protect people from life-altering financial losses, and auto insurance can help you avoid jail time, license suspension, and excessive fines and fees.

And while Aflac collects income every single day of the year from insurance payments, it will only have to put out if and when there are claims.

It has a massive operating cash flow (OCF) cushion of $4.4 billion over the past 12 months, with OCF being an indication of whether a company can generate positive cash flow to maintain and grow its business.

If it can’t generate sufficient positive cash flow, the company may need to borrow money, which is especially an issue when rates are higher.

So, if a recession were to arise, you know that Aflac has the high-demand products and cash war chest to survive it.

Not That

CompanyTickerDividend YieldHealth Indicator
Clorox Co.CLX3.46%Red Zone
Ecolab Inc.ECL1.40%Red Zone
Colgate-Palmolive Co.CL2.63%Red Zone

Not That Dividend Aristocrat Snapshot, No. 1: Clorox Co. (CLX)

In its August earnings press release, Clorox blamed the lack of growth in its gross margins on higher commodity costs, manufacturing costs, and logistics costs.

The problem is that every company in the world is dealing with some or all of these issues — and many are still able to achieve growth.

Clorox expects these issues to persist in 2023, and there’s only so much that the company can raise prices to make up for those expenses.

Most folks aren’t married to cleaning products – especially in a budget-strapped economy — and will buy whatever is a good price and gets the job done.

Until Clorox figures out how to increase its gross margins, CLX is a stock to avoid, a verdict confirmed by its current status in the Red Zone.

Not That Dividend Aristocrat Snapshot, No. 2: Ecolab Inc. (ECL)

Ecolab provides cleaning and sanitation products to the health care, hospitality, food service, lodging, government, and education industries.

It also offers water treatment solutions.

Although Ecolab does provide essential products, which should make it recession-resistant, it provides those products to industries that were hit hard by the pandemic.

Lodging, food service, hospitality, and the education industries do not need as many supplies if they are shut down or serving fewer people.

Add on top of that Ecolab’s estimate that delivered product costs increased 30% in Q2 2022 from the previous year, and the fact that it operates in more than 170 countries and has to account for a stronger dollar weighing on sales outside the United States, and you have the perfect recipe for a stock to avoid.

Not That Dividend Aristocrat Snapshot, No. 3: Colgate-Palmolive Co. (CL)

There’s a good chance you have at least one product from Colgate-Palmolive Co. in your kitchen or bathroom right now.

It’s the maker of cleaning and personal care brands such as Colgate, Palmolive, Speed Stick, Irish Spring, Ajax, Tom’s of Maine, and more.

But those name-brand dental and household cleaning products have not rewarded long-term shareholders.

Over the last five years, the CL stock price has gone up only 3.14%, while the S&P 500 climbed nearly 50% during that same time. And when a company underperforms the broader market, activist investors may come knocking.

Dan Loeb’s hedge fund, Third Point Management, has taken a reported $1 billion stake in Colgate because he believes Colgate’s pet food business could have a $20 billion valuation if it’s spun off.

A study from Deloitte and Edge Consulting Group found that between 2000 and 2014, spinoff stocks generated a 22% return within the first 12 months of trading.

That’s even better than the 14% return of the parent company that performed the spinoff. It’s also important to keep in mind that the dot-com bubble and Great Recession both took place between 2000 and 2014, so even in tough conditions, spinoff stocks have generally performed well during their first year of trading.

If Colgate were to follow Loeb’s advice and spin off the pet division, the data shows it could be a profit opportunity.

But there’s no guarantee that will happen, and if Loeb is right about his assessment of Colgate’s pet food business, it brings up concerns about the strategic vision of the management team.

We’ll follow our Health Indicator’s advice to stay away from this Dividend Aristocrat.