3 Dividend Aristocrats for the Long Term

Overview

While I have mainly focused on the broad energy sector recently, it is critical to have a well diversified portfolio not only in terms of sectors, but also in terms of having growth and dividend stocks.

Currently, the broad markets look stretched so it might be a good time to shift to some quality dividend stocks with low betas. If markets do see a correction in the foreseeable future, these stocks are relatively insulated. Furthermore, these stocks have a track record of delivering good dividends even in challenging economic times.

The three dividend aristocrats

3M Co. (NYSE:MMM) has been a value creator for investors in the past and is likely to remain one in the coming years. The company currently offers a dividend of $4.7 per share, which translates into a healthy dividend yield of 2.48%. The stock has also moved higher by 18% in the last 12 months. In addition to robust dividends, the company has created value through stock upside, which I see sustaining in the coming years.

In my view, there are two critical factors that will drive growth for 3M in the long term, ensuring the company will meet its target of 8% to 11% EPS growth. First, investments in research and development will help sustain organic growth in the range of 2% to 5%. Second, 3M is yet to exploit the potential in emerging markets. I believe both organic and inorganic growth in these markets will translate into revenue upside for the company.

From a dividend perspective, I expect higher dividends in the coming years with strong free cash flow. With additional efforts to reduce costs, 3M is likely to see gradual margin expansion as well.

Procter & Gamble Co. (NYSE:PG) is another quality dividend stock that currently offers a dividend of $2.68 and a dividend yield of 2.92%. Further, with a beta of just 0.51, I believe the stock is worth holding at its current market valuation. From a returns perspective, Procter & Gamble has delivered modest returns of 8.9% in the last 12 months, but even these returns are healthy considering the dividends and risk profile associated with investing in the stock.

The company has been successful with its slimmer portfolio of products so far. While organic sales were flat in the first half of 2016, they increased 1.5% in the second half. They further increased to 2.5% in the first half of 2017. Importantly, growth in China has reversed, which I see as a big positive for Procter & Gamble. In the coming years, China and India are likely to be the key growth drivers for the company.

The company has already paid dividends of $3.6 billion in the first half of fiscal 2017. For the year, the company intends to pay out $7 billion in dividends.

In addition, Procter & Gamble targets productivity savings of $10 billion from 2017 to 2021. I believe this target will enable the company to expand its margin. Between 2012 and 2016, Procter & Gamble witnessed cost of goods savings of around $7.2 billion. Therefore, the company is headed in the right direction in terms of enhancing productivity that will aid in shareholder value creation through dividends and share repurchases.

Since I am bullish on the energy sector and believe oil is likely to trend higher in the coming years, I am recommending exposure to a quality energy stocks that offers a healthy dividend. Chevron Corp. (NYSE:CVX) currently offers a dividend of $4.32 per share, translating into a healthy dividend yield of 3.79%. It is also worth noting that Chevron has gained 25% over the last 12 months.

Chevron expects 4% to 9% production growth in fiscal 2017 without the impact of asset sales. With the completion of its Australian liquefied natural gas projects, Gorgon and Wheatstone, Chevron has a good growth outlook for 2017 and beyond. These two projects have annual production capacity of more than 24 million tonnes of natural gas. With close access to Asia, where there is a booming energy demand, I expect the projects to be long-term growth drivers.

Chevron has reduced its capital spending target for fiscal 2017 to $19.8 billion from $22.4 billion in 2016. I do not see this as a concern since higher energy prices will benefit revenue and EBITDA numbers. Further, with its current capital budget, the company is likely to deliver positive free cash flow. This will help strengthen Chevron’s balance sheet and also gives additional cash buffer for dividends.

Conclusion

3M, P&G and Chevron have strong fundamentals. While these companies will deliver strong dividends, I also expect value creation for shareholders through stock upside.

Further, as I mentioned at the onset, markets look stretched in terms of valuation, so it might be a good idea to consider these relatively safe stocks for your portfolio.

Disclosure: No positions in the stocks discussed.

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