With inflation touching a multidecade excessive in 2022 and Fed elevating its rate of interest by 150 bps in the previous couple of months, it’s no shock that the inventory market has corrected considerably and buyers are flocking in direction of security. Dividend Aristocrats are one such class of inventory that has outperformed in the course of the earlier interval of slowdown.

Whereas passive buyers trying to spend money on Dividend Aristocrats could also be happy investing in ETFs like ProShares S&P 500 Dividend Aristocrats ETF (NOBL) which offers publicity to greater than 60 Dividend Aristocrats within the S&P 500 (SPY), energetic buyers could profit from figuring out which of those Dividend Aristocrats have the very best prospects going ahead.

On this article, I’ve began with over 60 Dividend Aristocrat corporations from S&P 500 and screened them utilizing the parameters like income and earnings progress prospects, valuation, dividend yield in addition to sure qualitative metrics to provide you with a listing of the 5 Finest Dividend Aristocrats amongst S&P 500 corporations. I’ve then mentioned their basic prospects.

The market has corrected considerably and there are a number of cut price alternatives out there available in the market. At this time limit, I do not assume it makes a lot sense to purchase expensive shares. So, the primary parameter I used to display screen is valuations. I’ve targeted solely on the inventory buying and selling at lower than 20x the present yr in addition to ahead P/E. This implies ignoring a number of high-quality corporations like Brown-Forman (BF.B), Clorox (CLX), Cintas (CTAS), Automated Information Processing (ADP), Sysco (SYY), Colgate-Palmolive (CL), Coca-Cola (KO), McDonald’s (MCD), Roper Applied sciences (ROP), Procter & Gamble (PG), Hormel Meals (HRL), Sherwin-Williams (SHW), Air Merchandise and Chemical substances (APD), Abbott Laboratories (ABT), Kimberly-Clark (KMB), and Becton, Dickinson and Co. (BDX). I perceive some buyers would possibly differ with me saying that these are actually good corporations and they’re buying and selling at greater multiples as a result of they’ve good companies. I fully agree with these buyers, however the intention of this text is to not discover good alternatives, it’s to search out the very best alternatives.

There’s additionally some danger related to a number of of those names. It would not be that easy for Procter & Gamble to lift costs to offset the rising value of products offered given the way in which that inflation is biting shopper wallets. Consequently, its margins are anticipated to say no this yr. The unfavourable impression of inflation on shopper demand can also be seen in McDonald’s gross sales, that are anticipated to develop by simply 0.65% Y/Y this yr, in keeping with consensus estimates. McDonald’s can also be dealing with long-term threats from modifications in shopper meals preferences. Its efforts to make its providing extra health-conscious have been largely unsuccessful, and it’s now concentrating on its core menu. Talking of unhealthy meals choices, Coca-Cola, the maker of empty-calorie sugary drinks, can also be eradicated at this stage. Others, reminiscent of Sherwin-Williams, haven’t got many business-specific points however are dealing with macro headwinds from slowing housing and different finish markets. I feel we’re avoiding some dangerous names by utilizing this valuation criterion. Do not get me unsuitable, I’m not saying these shares are a promote due to these dangers and better valuations. All I’m saying is that they do not qualify as the very best Dividend Aristocrats on our listing.

The second criterion I used is earnings progress within the present and the following yr. I’ve solely shortlisted corporations with optimistic consensus EPS progress forecasts for the present yr and the following. This has allowed us to keep away from corporations like Goal (TGT), that are dealing with vital headwinds from shopper spending cooling off in addition to Exxon (XOM) and Chevron (CVX), that are benefiting from excessive oil costs that won’t maintain at these ranges. Some readers could argue that oil costs could stay excessive for a very long time and the valuations of those oil corporations are low-cost. Nevertheless, nobody can deny that there’s a danger of oil costs cooling off in the long run if geopolitical pressure round Russia eases or a few of the Iranian provide comes into the market or President Biden is ready to persuade Saudi Arabia and different Gulf nations to extend manufacturing. There’s additionally a secular long-term risk from electrical car adoption. So, whereas these corporations should be a purchase based mostly on valuation and near-term traits, I do not assume one can name them the very best amongst S&P 500 Dividend Aristocrats.

My ultimate quantitative screening parameter is the dividend yield. Since dividend yield is among the major concerns for many buyers buying Dividend Aristocrats, it is necessary that we search for a good present yield. Given the expectation about Federal Reserve elevating charges to three% by subsequent yr, Dividend Aristocrats, for my part, ought to have a yield of a minimum of 2% to be thought of among the many finest. This implies rejecting corporations with prospects like Pentair (PNR), Walmart (WMT), Lowe’s (LOW), and W.W. Grainger (GWW). They might qualify for the very best inventory based mostly on different standards reminiscent of long-term progress or valuation, however I consider most buyers are searching for an affordable yield on this listing. Utilizing these three quantitative screening standards, we get the next shares as contenders for the very best Dividend Aristocrats – Common Dynamics (GD), Caterpillar (CAT), Emerson Electrical (EMR), Johnson & Johnson (JNJ), Real Components Firm (GPC), Medtronic (MDT), Amcor PLC (AMCR), VF Company (VFC), 3M Firm (MMM), and Worldwide Enterprise Machines (IBM).

Along with quantitative components, I’ve additionally used some qualitative components to exclude some shares. My common readers know that I like the valuation and progress prospects of 3M Firm. Whereas there are authorized dangers related to earplugs and PFAS-related lawsuits, I consider a few of the investor’s considerations are exaggerated. Nevertheless, there’s nonetheless appreciable uncertainty, and through a slowdown or a bear market, many buyers begin pricing within the worst-case situation. Since there are different shares out there with none authorized uncertainties, I’ve excluded 3M Firm as properly.

Given the impression of inflation on shopper funds, I’m additionally sceptical of shopper discretionary shares. As a consequence of its publicity to luxurious retail, VF Company is more likely to face headwinds. Real Components Firm could also be impacted as properly, as greater gasoline costs and tighter shopper budgets could scale back miles pushed. The corporate additionally faces long-term threats from AutoZone (AZO) and O’Reilly (ORLY) gaining market share. So, I’ve excluded these two as properly.

Common Dynamics has accomplished properly thus far this yr as geopolitical tensions with Russia turned the deal with defence shares. It’s now buying and selling at a premium to its 5-year common P/E a number of. I often choose shopping for defence inventory throughout occasions of peace when they’re out there at a less expensive valuation. Geopolitics is often arduous to foretell which provides to the uncertainty and therefore, I received’t embrace it in my finest Dividend Aristocrat listing.

I may even prefer to exclude Amcor PLC. Whereas Amcor is doing alright when it comes to enterprise, greater than 95% of its gross sales is derived from shopper finish markets primarily Meals and Drinks. As is the case with VF Company and Real Components Firm, with inflationary considerations impacting shoppers, the quick to medium-term outlook isn’t very vibrant. Additionally, the rising considerations round single-use plastics, with even rising nations like India taking steps to ban them, is a danger for the corporate.

This provides us a ultimate listing of the 5 finest dividend shares within the S&P 500. Beneath is a have a look at every of them intimately.

Johnson & Johnson

JNJ is buying and selling at 17.49x FY22 EPS and has a ahead dividend yield of two.52%. Johnson & Johnson is among the finest defensive shares and the corporate’s CFO, Joe Wolk’s quote from the final earnings name sums it up,

Whereas many issues have modified on the planet since our final name (This autumn 2021), a lot has stayed the identical for Johnson & Johnson.”

Aside from adjusting for the 25 cents impression from antagonistic FX motion, the corporate’s earnings steerage for FY22 remained the identical regardless of of Russia-Ukraine warfare breaking out, provide chain constraints worsening, Chinese language omicron-related lockdown, and different headwinds.

Nevertheless, being defensive just isn’t the principle motive JNJ is among the finest Dividend Aristocrats within the S&P 500. The corporate’s good progress prospects regardless of its defensive nature is what make it the very best.

Final quarter, the corporate posted adjusted operational gross sales excluding the online impression of acquisitions and divestitures and foreign money translation of seven.9% Y/Y with MedTech and Prescription drugs rising at 8.6% Y/Y and 9.3% Y/Y, respectively. The corporate’s near-term prospects look vibrant with a restoration in procedural surgical procedures. In its final earnings name, administration talked about sequential enhancements from February to March and March to April in Procedural Surgical procedures. That is more likely to proceed with the economic system reopening. Additionally, whereas the corporate could really feel the impression of the Chinese language lockdown and provide chain woes in Q2 2022, issues are bettering with the Chinese language economic system reopening and provide chain constraints easing. This could assist 2H 2022.

Within the medium time period, administration is planning to take a number of steps to create shareholder worth. The corporate is spinning off its shopper division. The MedTech and Pharmaceutical companies have a very good overlap of their buyer base, whereas the dynamics of the patron enterprise is a bit completely different. So, separating these two companies to handle them successfully is sensible. The corporate’s shopper enterprise has publicity to a number of high-growth classes like skincare, child care, oral care, and shopper well being (OTC) which bodes properly for the brand new firm and may help it obtain a greater progress price and valuation in comparison with different shopper friends. For the remaining enterprise, administration has good progress plans. Its goal is to extend pharmaceutical gross sales to ~$60 bn by 2025 based mostly on the prevailing portfolio and its present pipeline. Administration is fairly assured in attaining this goal. Jennifer Taubert, the corporate’s EVP, and worldwide chairman, Prescription drugs, lately commented at a convention,

As we take into consideration why we’re so assured for the $60 billion, I feel the primary is once you check out our present portfolio, the property that we’ve, the terrific momentum and trajectory that they’re on in addition to the truth that merchandise like DARZALEX, ERLEADA, TREMFYA, even our long-acting injectable therapies in neuroscience, we proceed to construct these property out. They’re on an important trajectory, and we consider there’s loads of runway, going into earlier affected person populations, advancing mixture therapies, et cetera. So we consider that these property are going to proceed to develop. We predict that, that enterprise can also be de-risked. These are property which might be already in the marketplace. And we have got nice insights for the extra indications which might be going to return.

Then the second piece is our pipeline. So what we communicated again in November was as many as 14 transformational new property coming to market throughout these key therapeutic areas that I discussed, every having a minimum of $1 billion in peak gross sales potential and in reality, 5 that we consider have $5 billion-plus potential. These 5 being our BCMA CAR-T, CARVICTY that we truly already acquired approval for and have launched in the USA this yr and simply acquired approval for in EMEA. The following is nipocalimab that we introduced in from our Momenta acquisition and the place we’re at present growing 11 completely different indications concurrently. We actually consider that this can be a pipeline in a product and the place we’re going to have the ability to rework autoantibody-driven illnesses. And so we’re actually constructing that out. We predict that, that’s going to have a major impression. The following one is a mix of rybrevant plus lazertinib for EGFR-positive lung most cancers. And we expect that this routine has potential to be superior to TAGRISSO and EGFR-positive lung most cancers, and we expect that, that has very sturdy potential.“

On the MedTech aspect, I count on the corporate to strengthen its aggressive place in next-generation applied sciences and progress areas by a number of M&As. The corporate had over $30 bn in money and short-term funding as of the final quarter and its sturdy stability sheet provides it ample flexibility to pursue its inorganic technique.

I don’t assume these grown prospects are correctly getting mirrored within the investor’s expectations or consensus estimates and there’s a chance of optimistic shock and upward revision of estimates as the corporate continues to execute its plans over the following few years. Other than strong fundamentals, the technical additionally seems to be good with the inventory persevering with its upward journey and seeing little impression from the latest inventory market rout.

Worldwide Enterprise Machines Company

IBM is buying and selling at 14.41x FY22 consensus EPS estimates and 13.24x FY23 consensus estimates. It has a ahead dividend yield of 4.68% which is the very best in my finest Dividend Aristocrat listing.

After lagging behind its friends for the previous a number of years, the corporate is now making modifications to extend its focus and agility, and construct a robust client-centric tradition. Some examples of this embrace placing experiential promoting, consumer engineering and co-creation on the coronary heart of its consumer engagement mannequin. The corporate has invested in tons of of buyer success managers to assist purchasers seize extra worth from its options and it has additionally upgraded workforce abilities with fewer generalists and extra technical specialists. That is resonating properly with purchasers and consumer renewal charges growing and the corporate’s recurring income base rising. As well as, IBM is beginning to see indicators of gross sales productiveness enhancements. This bodes properly for future income and margin efficiency.

IBM can also be pivoting in direction of high-growth cloud and AI options to deal with the wants of its clients. Lately, it spun off its low-margin and slow-growing managed infrastructure companies enterprise into Kyndryl (KD). Publish this spin-off the corporate’s income combine shifted in direction of high-growth software program and consulting enterprise which will likely be a tailwind for its income progress within the coming years.

Along with company-specific initiatives, IBM can also be poised to profit from accelerating IT spending by purchasers who wish to drive productiveness by digitization. The corporate’s technicals look good as properly and the inventory hasn’t seen a lot draw back in the course of the latest market correction. I consider there’s a good chance that the inventory may even see a breakout on the upside after a number of years of consolidation. I’ve shared my detailed analysis on IBM earlier this yr which will be discovered right here.

Medtronic plc

MDT is buying and selling at 16.36x FY23 consensus estimates versus its 5-year common of 20.28x. The inventory has a ahead dividend yield of two.98%.

Medtronic is the second healthcare firm on this listing. Nevertheless, its efficiency has not been as sturdy as Johnson & Johnson and its inventory has corrected meaningfully since final September. The corporate’s gross sales, in addition to margins, have been adversely impacted by provide chain woes within the final quarter. The corporate’s surgical improvements enterprise acquired impacted by chip shortages whereas rising resin costs additionally impacted prices. Whereas the corporate remains to be more likely to face some headwinds from the provision chain within the present quarter, these constraints are easing, which together with simpler comparisons ought to assist the corporate within the again half of this yr.

In the long term, the corporate is engaged on centralizing the provision chain. One distinction between JNJ’s and Medtronic’s provide chain is that Medtronic’s provide chain is fairly fragmented and loads of procurement is finished at native ranges. This makes it much less resilient. So, the corporate is working in direction of centralizing it to make it extra standardized and get leverage from its scale. The concept is to get considerably extra value of products offered productiveness in addition to enhance provide chain resiliency. I consider this will likely be a significant driver for the corporate’s margin and EPS progress in the long run.

Emerson Electrical Co.

EMR is buying and selling at 15.88x FY22 consensus EPS estimates and 14.59x FY23 consensus EPS estimates. It is a low cost to its 5-year common ahead P/E of 20.74x. The inventory has a ahead dividend yield of 2.56%.

Emerson’s is seeing good order exercise and has a robust backlog which ought to assist its income within the close to time period. The corporate was capable of ship ~24% incremental margins final quarter regardless of provide chain challenges and inflationary stress. Emerson appears to be benefiting from the fee re-set within the Automation Options enterprise during the last a number of years. With provide chain disruptions easing, I count on the incremental margin to proceed bettering trying ahead. In the long run, the corporate is ready to profit from rising traits towards decarbonization and sustainability. The corporate is trying to make use of M&As to optimize its portfolio in direction of greater progress/much less risky choices which ought to assist it obtain the next P/E a number of. The lately accomplished acquisition of Aspen Expertise is one such instance which ought to end in a robust industrial software program portfolio providing to focus on clients who’re more and more adopting digitization to enhance productiveness.

Caterpillar Inc.

CAT is buying and selling at 14.08x FY2022 consensus EPS estimates versus its 5-year common ahead P/E of 18.62x. The inventory has a ahead dividend yield of 2.69%.

Caterpillar has been experiencing sturdy demand for its merchandise from its finish markets, which led to a rise within the backlog by $3.Four bn within the final quarter. Wanting ahead, the corporate’s backlog progress ought to additional profit from the ~$1.2 Trillion Infrastructure Funding and Jobs Act (IIJA) within the U.S., which is predicted to circulation beginning in 2023, and the EU funding package deal within the EAME area. The upper commodity demand can also be driving the manufacturing ranges at mining corporations, benefiting the corporate’s backlog progress. Because the Covid lockdowns in China are lifted and the provision challenges ease, the corporate’s backlog conversion price ought to enhance. The opposite driver of gross sales progress is the worth hikes that the corporate carried out throughout its enterprise portfolio to offset the fee pressures. The upper value realization, wholesome backlog, sturdy demand, and easing provide chain constraints ought to drive the gross sales progress of the corporate.

The corporate’s margins are anticipated to enhance within the second half of 2022 as pricing actions proceed to take maintain. The corporate has additionally reaffirmed its goal of 300 to 600 foundation level enchancment within the adjusted working revenue margins versus its historic efficiency (reference interval of 2010 to 2016) and plans to repurchase $15 billion in shares to create worth for its shareholders. Throughout the subsequent Three years, the corporate plans to extend its dividend yearly by a minimum of a excessive single-digit share.

I’ve mentioned the corporate’s progress prospects in a earlier article right here.

Bottomline

Dividend Aristocrats are an important addition to 1’s retirement portfolio. I’ve tried to offer a listing of Dividend Aristocrats which I consider have good quick in addition to long-term progress prospects along with good yield. This may enable buyers to profit from capital appreciation as properly along with having fun with common dividends. I’m positive that a few of you’ll even have nice dividend concepts. Please be happy to share your ideas on my finest Dividend Aristocrats listing in addition to your concepts within the remark part under.