The world has been witnessing the nastiest pandemic in over a century, which has already triggered the worst recession in 75 years. The relentless health crisis also caught up with dividend stocks, forcing many companies to slash or discontinue payouts altogether. So, investors should turn to dividend aristocrats to secure a stable and reliable source of income as the historically low interest rates kept the bond market unattractive.

Dividend aristocrats are an exclusive list of 65 stocks in the S&P 500 Index that have raised their dividends for at least 25 consecutive years. Historically, dividend aristocrats have outperformed the broader market in a struggling economy, as their business models are usually less cyclical than the economy as a whole. This is evident from ProShares S&P 500 Aristocrats ETF’s (NOBL) 7.7% gain in the past three months compared to SPDR S&P 500 ETF’s (SPY) 3.4% return in the same period.

Amid the rising spread of the coronavirus infections, staggered restrictions, higher jobless claims, and shrinking economic activity, the potential for a double-dip recession could lead to a stock-market crash unless the world can control the spread of the virus with the help of effective vaccines or treatments. Hence, for risk-averse investors, it may make sense to buy high-quality dividend stocks. Moreover, it is important to ensure the sustainability of a company’s dividend payment based on strong fundamentals, cash flows, and business model before betting on it.

Johnson & Johnson (JNJ), The Procter & Gamble Company (PG), Lowe’s Companies, Inc. (LOW), Carrier Global Corp. (CARR) are the four dividend aristocrats that not only hold immense price appreciation potential but could also be a steady source of income as they are expected to return more capital to their shareholders over the coming years through dividends.

Johnson & Johnson (JNJ)

JNJ researches, develops, manufactures, and sells various products in the healthcare field worldwide and is popularly known for its consumer products such as baby care, women’s health, and wound care. The company has operations in the pharmaceutical, consumer, and healthcare devices segments. JNJ is working on a potential COVID-19 vaccine and has recently initiated the second global phase 3 clinical trial of its Janssen vaccine candidate.

JNJ has uniformly increased its dividend payout for 58 years now. Over the past ten years, the dividend payout for JNJ grew at a CAGR of 6.9%. The current annual dividend of $4.04 translates into a 2.81% yield. The company has already declared a cash dividend of $1.01 per share for the fourth quarter. JNJ generated $7.65 billion as free cash flow in the third quarter and returned $2.66 billion to its shareholders in the form of dividends.

Over the past 3 years, revenues and EPS have grown at a CAGR of 2.8% and 3.4%, respectively. In the last reported third quarter, JNJ recorded a top-line of $21.1 billion, increasing 1.7% year-over-year. The consumer products and pharmaceutical segments saw a recovery in revenue, and consequently, worldwide sales improved 1.7% year-over-year. EPS for the quarter came in at $1.33, surging 101.5% compared to the year-ago quarter.

Driven by its diversified product portfolio and focus on growth, analysts expect EPS to grow 12.4% next year and 4.4% per annum over the next five years. The company has a robust drug pipeline with more than 14 new drugs expected to launch by the end of 2023. It has recently submitted applications to the FDA and European Medicines Agency (EMA) seeking approval for Darzalex Faspro for patients with relapsed or refractory multiple myeloma. JNJ also submitted Paliperidone Palmitate 6-month supplemental new drug application to the FDA earlier this month for treatment of schizophrenia in adults.

How does JNJ stack up for the POWR Ratings?

A for Trade Grade

A for Buy & Hold Grade

A for Peer Grade

A for Industry Rank

A for Overall POWR Rating.

You can’t ask for better. It is also ranked #1 out of 240 stocks in the Medical – Pharmaceuticals industry.

The Procter & Gamble Company (PG)

PG manufactures and sells branded consumer packaged goods with operations in approximately 70 countries worldwide. PG is a consumer staples company that has been around for 182 years. The company operates through six segments – Beauty, Grooming, Health Care, Fabric Care & Home Care, Baby, Feminine & Family Care, and Corporate.

Dividend raises have become rarer in the consumer sector amid the pandemic. However, PG has been paying uninterrupted dividends for 130 years and has raised its payout in each of the last 64 years. Over the last ten years, its dividend has grown at a CAGR of 5.6%. PG’s annual dividend of $3.16 presently yields 2.28%. The company increased its dividend by 6% in April to $0.79 despite the pandemic. The most recent dividend of $0.79 was declared by PG in October.

PG’s fiscal first quarter ended September 2020 results did not fail to impress the street. Net sales of $19.3 billion increased 9% year-over-year, primarily driven by a 7% increase in organic shipment volume. The company reported a free cash flow of $3.9 billion, remaining relatively stable over the previous year despite the adjusted free cash flow productivity being 95%. It returned $2.03 billion to its shareholders in the form of dividends. EPS came in at $1.63, growing 20% year-over-year.

PG has recently announced the pricing of its debt tender offer worth $1.5 billion to improve its liquidity. The company currently owns just 65 brands, down from 170 that it owned five years ago. The move to divest low-margin products to build a stronger, learner portfolio is significantly improving PG’s cash flows. The fact that PG delivered higher sales and profits in this extraordinary environment should be reassuring for its dividend investors. Hence, analysts expect the company’s EPS to grow 6.3% next year and 8.5% per annum over the next five years.

It’s no surprise that PG is rated “Strong Buy” in our POWR Ratings system. It also has an “A” for Trade Grade and Buy & Hold Grade, and a “B” for Peer Grade and Industry Rank. Among the 34 stocks in the Consumer Goods industry, it’s ranked #1.

Lowe’s Companies, Inc. (LOW)

LOW operates as a home improvement retailer in the United States and Canada, serving approximately 18 million customers a week. The company offers a line of products for construction, maintenance, repair, remodeling, and decorating. As of September 30, 2020, LOW’s operated 1,969 home improvement and hardware stores. The company also sells its products through its websites and mobile application.

LOW has paid and raised the dividend without fail for over 57 years now and over the past 20 years, LOW’s dividend has grown at an average rate of 19.4%. Moreover, the CAGR of the company’s free cash flow has been 18.1% in the same period. LOW’s annual dividend of $2.40, presently translates into a yield of 1.55%. The company has recently paid a dividend of $0.60 for its fiscal third quarter ended October 2020, increasing its payout by 9.1% sequentially. This cumulated to $416 million in the form of dividends. Moreover, LOW has already declared a cash dividend of $0.60 per share for its fiscal fourth quarter.

The company delivered very strong third-quarter results, with all merchandising divisions posting comparable sales growth exceeding 15% and all US geographic regions delivering comparable sales growth of at least 20%. Net sales for the quarter were $22.3 billion compared to $17.4 billion in the comparable quarter last year. Online sales surged 106% year-over-year. Adjusted EPS came in at $1.98, 40.4% higher than the year-ago value of $1.41.

LOW proposed a plan to hire 20,000 associates across its US stores and regional distribution centers to support customer demand this holiday season and beyond. The company’s big investments into omnichannel (bricks and clicks) are likely to drive growth in the future. Analysts expect EPS to rise 0.9% next year and 20.6% per annum in the next five years. Hence, investors may expect the company to increase its payout as well.

Under our POWR Ratings, LOW has a “B” for Buy & Hold Grade and Industry Rank. Among the 69 stocks in the Home Improvement & Goods industry, it’s ranked #46.

Carrier Global Corp. (CARR)

CARR was a spin-off from former industrial multinational conglomerate United Technologies Corporation (UTC) and is a newly listed company. The company provides heating, ventilating, and air conditioning (HVAC), refrigeration, fire, security, and building automation technologies worldwide under the brand portfolio including Carrier, Kidde, Edwards, LenelS2, and Automated Logic. It primarily operates through three segments – HVAC, Refrigeration, and Fire & Security.

CARR has consistently grown its dividend payout for 26 years as a part of UTC. The current annual dividend of $0.32 translates into a 0.85% yield. CARR generated $2.51 billion as net operating cash flow in the trailing-12-months. The company declared a cash dividend of $0.08 per share in the last reported quarter. CARR produced $880 million as free cash flow in the third quarter, rising 55% year-over-year, and returned $70 billion to its shareholders in the form of dividends.

CARR’s third-quarter sales of $5 billion were up 3.7% year-over-year, including 3% organic sales growth. The growth was largely driven by record demand in North American residential HVAC, which was up 46% compared to the prior year, and an improved economic climate. Additionally, most businesses saw sequential improvement in the quarter. However, adjusted EPS for the quarter came in at $0.67, declining 9.5% year-over-year.

CARR benefitted from volume growth in the HVAC business, improved order trends, and aggressive cost actions, driven by the rising urban temperatures, growing middle class demanding indoor climate control, and urbanization that is significantly favoring its organic growth. CARR’s previously announced Carrier 600 program, which targets $600 million in cost savings over three years to fund strategic initiatives, was increased by $100 million during the quarter to become Carrier 700. Consequently, analysts expect next year’s EPS to rise by 11.1% year-over-year.

CARR’s OptiClean Dual-Mode Air Scrubber & Negative Air Machine has recently been named as one of TIME’s 100 Best Inventions of 2020. The OptiClean was developed through rapid innovation in early 2020 to help support infectious isolation rooms in hospitals. Moreover, the company could benefit from Pfizer’s (PFE) COVID-19 vaccine, whose delivery is anticipated to start in the coming weeks, which requires cold chain storage of negative 70 degrees Celsius.

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JNJ shares were trading at $143.70 per share on Monday morning, down $0.30 (-0.21%). Year-to-date, JNJ has gained 1.19%, versus a 13.46% rise in the benchmark S&P 500 index during the same period.

About the Author: Sidharath Gupta

Sidharath’s passion for the markets and his love of words guided him to becoming a financial journalist. He began his career as an Equity Analyst, researching stocks and preparing in-depth research reports. Sidharath is currently pursuing the CFA program to deepen his knowledge of financial anlaysis and investment strategies. More...

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