Dividend Aristocrats, a group of companies that have increased their annual dividends for at least 25 years in a row, can be a nice investment for those seeking reliable dividend growth and low risk of a dividend cut.
However, due to their above-average safety and reliability, valuations can be high, which depresses the dividend yields available from these stocks. Many Dividend Aristocrats thus don't offer overly high dividend yields.
There are outliers, though.
Below, we will look at three Dividend Aristocrats that offer dividend yields of at least 5%, making them suitable for income investors that not only value reliability, but want to benefit from high income yields at the same time.
Big Blue Income Stream
IBM Corp (IBM) is a tech company that is active across different businesses, primarily enterprise solutions for software and services. It also offers infrastructure and financial services to its customers.
IBM has increased its dividend for a compelling 28 years in a row, i.e. throughout both the bursting of the Dot-Com bubble, when many tech companies came under pressure, and the Great Recession, when companies across different industries were forced to cut their dividends.
IBM's business growth hasn't been very pronounced in recent years, which is also due to asset sales and the recent Kyndryl spinoff. The weak earnings-per-share performance that can be attributed to these factors resulted in a low dividend growth rate, as IBM couldn't increase its dividend at a high pace without generating a comparable EPS growth rate.
Still, the dividend continued to grow, and at current prices, the dividend yield stands at 5.0%, which is appealing. This is especially true when we compare IBM's dividend yield to what is available from other tech companies -- many don't offer any dividend payments at all, and those that do often have pretty low dividend yields.
The dividend payout ratio is slightly below 70%, based on current EPS forecasts for this year, which isn't low. But considering that IBM generates reliable and sizable free cash flows and that its EPS growth is forecasted to improve in the coming years as the turnaround progresses, we still do believe that the dividend-cut risk isn't high.
More Than an Aristocrat
Leggett & Platt, Inc. (LEG) is an engineered products manufacturer that primarily sells bedding components and other furniture products. The company's history dates back to the 1880s, and the company is valued at around $4 billion today.
Leggett & Platt is not only a Dividend Aristocrat, but thanks to its 52 years of uninterrupted dividend increases, it qualifies as a Dividend King.
Inflation has hurt the company's profitability in the very recent past, and at the same time, consumers do not spend as much on furniture in the current environment, compared to the years during the pandemic, when lockdowns made consumers spend more on their homes and related interior products. That is why Leggett & Platt has seen its profits pull back versus the highs seen in 2021.
The profit decline that is expected for the current year, both by management and by Wall Street analysts, could result in a dividend payout ratio of slightly more than 100%. While this isn't great, it does not mean that the company will automatically cut its dividend. Instead, Leggett & Platt could use some of its balance sheet strength to gap the profit shortfall this year, while EPS growth in the coming years should allow for an improving dividend coverage ratio.
While a dividend cut can't be ruled out, we believe that the above scenario is more likely -- the company's more than 50 years of uninterrupted dividend increases prove that Leggett & Platt has what it takes to stomach temporary headwinds and unfortunate macro developments. It seems likely, however, that dividend growth will be rather muted in the coming years, as the company will focus on bringing down its dividend payout ratio, which will require a below-average dividend growth rate.
With a dividend yield of 5.6%, Leggett & Platt offers one of the highest yields in the Dividend Aristocrat universe.
Make an Alliance With This Aristocrat
Walgreens Boots Alliance, Inc. (WBA) is a leading pharmacy company that is active in the United States and some European countries. The company's history dates back more than 120 years, and the company has since grown into a pretty large company with more than 300,000 employees that operate more than 13,000 stores.
Walgreens Boots Alliance has seen its shares underperform the broader market substantially over the last one, five, and 10 years, but that was not the result of declining profits and dividends. Quite the contrary: The company's underlying performance has been solid, but its valuation compressed significantly over the last couple of years, which has caused share price declines despite a compelling underlying performance.
When it comes to serving up reliable dividend growth, Walgreens Boots Alliance looks pretty strong. With 47 years of uninterrupted dividend growth, the company is a Dividend Aristocrat that could soon become a Dividend King. Over the last decade, the dividend has grown by around 70%, which isn't ultra-fast but very solid.
Demand for pharmaceutical and other healthcare-related products isn't cyclical, as people require these products during economically good times and during bad times. That is beneficial for Walgreens Boots Alliance, as it results in a recession-resilient, non-cyclical business model that has allowed the company to keep its dividend growth track record intact during all kinds of crises.
At current prices, Walgreens Boots Alliance trades with a dividend yield of 6.0%, which is pretty attractive in absolute terms, and which is also one of the highest dividend yields the company has traded at in recent memory. The dividend payout ratio stands at 42% today, which indicates that there is very little risk of a dividend cut when putting one's money in Walgreens Boots Alliance's shares.
With a pretty low earnings multiple of just 7.1, Walgreens Boots Alliance looks undervalued. We believe that multiple expansion tailwinds will impact the company's total returns positively over the coming years, which is why we are forecasting total returns of well above 10% for those that buy at the current price.