My 3 Top Dividend Aristocrats to Buy in 2022 and Hold Forever

The Motley Fool
The Motley Fool

Dividend Aristocrats generally offer some of the safest yields in the stock market, yet they also offer investors promising potential to outperform. When these dividend-growing companies maintain a payout ratio below 50%, it often highlights a market-beating balance between returning cash to shareholders and fueling future sales growth.

Today, we will look at three Dividend Aristocrats that seem to have found this balance and look primed to continue outperforming the market.

Image source: Getty Images.

1. Lowe's

With its 1.4% dividend yield, home improvement specialist Lowe's (NYSE: LOW) offers investors the largest payout of the three dividend growers we will look at today. While this relatively small dividend may not immediately take your breath away, if an investor bought shares of Lowe's five years ago and held until today, they would already be yielding 4.2% on their original cost.

This simple bit of dividend growth demonstrates the beauty of buy-and-hold dividend growth investing. Better yet, by maintaining a low payout ratio of 24%, Lowe's can easily fund its dividend while maintaining extra cash available to support new growth options.

Recording 12% annual revenue growth year over year, the company looks more robust than ever and should thrive as houses in the U.S. continue to age and stay in short supply.

LOW Return on Invested Capital (3y Median) data by YCharts

Best of all, Lowe's return on invested capital (ROIC) has rapidly begun trending upwards, highlighting improving profitability across its assets. Historically, investing in companies with an increasing ROIC has proven to be a great way to find outperforming stocks in the market -- making Lowe's recent jump particularly appealing.

In addition to growing revenue and ROIC figures, the company has lowered its share count by 19% over the last five years, helping its earnings per share triple over that same time.

Thanks to these shareholder-friendly capital returns, Lowe's looks set to extend the 700% share price increase it has achieved over the past decade, making it a prime holding for dividend growth investors.

2. Sherwin-Williams

Following in Lowe's footsteps and riding the wave of helping rejuvenate older houses, Sherwin-Williams (NYSE: SHW) offers investors a 0.7% dividend while being one of the most iconic brands in the U.S. Even though this dividend doesn't qualify the company as a high-yield investment, it has grown for 42 consecutive years and registers a payout ratio of only 25%.

This low payout ratio shows that, despite currently yielding less than 1%, Sherwin-Williams has ample room to continue raising its dividend far into the future.

Perhaps most importantly for investors, Sherwin-Williams is still just beginning its long-term global growth story, with 80% of its sales coming from the U.S. and Canada.

This international expansion potential, paired with its focus on mergers and acquisitions (11 acquisitions in the last decade), gives the company steady revenue growth options for the future.

SHW Revenue (TTM) data by YCharts

Ultimately, thanks to this historically steady revenue growth and free cash flow margin of 13%, Sherwin-Williams looks to be a classic "boring" stock that could quietly outpace the market over the next decade.

3. S&P Global

While better known for its popular S&P 500 Index, S&P Global (NYSE: SPGI) consists of four distinct business segments: Ratings, Market Intelligence, Platts (commodities platform), and Dow Jones Indices. Of these segments, the company generates roughly 75% of its revenue and over two-thirds of its operating profit from just its Ratings and Market Intelligence segments.

S&P Global records a massive 46% free-cash-flow margin through these diversified operations, allowing management to return $9.3 billion in cash to shareholders since 2016.

SPGI Shares Outstanding data by YCharts

Thanks to these cash returns, the company has doubled its dividend in just the last five years while gradually decreasing its total share count. However, despite this focus on returning cash to shareholders, the company's growth story is far from over.

As S&P Global's $44 billion acquisition of IHS Markit marches closer to being finalized, the company sits on the precipice of becoming a true market intelligence juggernaut. Once this acquisition is approved, the company expects recurring sales to account for over 75% of total revenue.

Overall, S&P Global's 0.7% dividend may not jump off the page at potential investors. Still, its 16% annualized growth rate over the last five years shows massive dividend potential -- especially looking out over the very long term and factoring in its trim 22% payout ratio.

High dividend growth rates

Metric Lowe's Sherwin-Williams S&P Global
Dividend Yield 1.4% 0.7% 0.7%
Payout Ratio 24% 25% 22%
Dividend Yield Potential 5.9% 3% 3.3%
5-year dividend growth CAGR 18% 14% 16%
Years of consecutive dividend growth 46 42 48

Data Source: The Motley Fool and Seeking Alpha. Dividend Yield Potential = Yield / Payout Ratio. CAGR = Compound Annual Growth Rate.

While these three stocks do not offer immediate high-yield potential, their growth rates show that investors should thrive if they buy and hold for the next decade. Furthermore, these dividends are very well-funded with low payout ratios, making additional dividend increases seem all but inevitable, barring an unforeseen catastrophic event.

LOW Total Return Level data by YCharts

Thanks to these factors, I am optimistic that these three dividend growth stocks will continue beating the market, just as they have done for the previous decade.

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Josh Kohn-Lindquist owns Sherwin-Williams. The Motley Fool owns and recommends S&P Global. The Motley Fool recommends Lowes and Sherwin-Williams. The Motley Fool has a disclosure policy .

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