Weary investors scouring the landscape to find decent dividend stocks to buy should take a hard look at the latest list of Dividend Aristocrats.
The S&P 500 Dividend Aristocrat Index measures the performance of companies in the S&P 500 Index with amarket value of at least $ 3 billion that have increased dividends for at least 25 consecutive years.
In 2013, only 54 companies, approximately 11% of companies in the S&P 500, made the cut.
Actually, it's no surprise this group of dividend stocks is tiny.
Think about it.
These companies have raised dividends for the last 25 years – a period of time that included the Great Recession, numerous oil price shocks, at least two major market meltdowns and wars in Iraq and Afghanistan.
If they can steadily raise their dividends in the face of that kind of adversity, you can be pretty confident they're going to be around for awhile.
They're the kind of companies that consistently deliver the goods, having outperformed the rest of the S&P 500 on a regular basis. The Aristocrats returned 4.59% annually over the last five years, while the group as a whole produced a negative 0.25% return for the period.
These are businesses with strong balance sheets, healthy earnings and cash flow generation that can help you protect your portfolio – regardless of the market's direction.
But not every Aristocrat is worthy of your hard earned dollars.
Some drop by the wayside. Others are increasing their dividend by draining capital from their business.
Here's what to look for when choosing the best dividend stocks to buy.
Aristocrats Can Come and Go
Every year in the third week in January, S&P releases an updated list of qualifying companies – and quietly drops those that don't cut it anymore.
Even though Pitney Bowes Inc. (NYSE: PBI) raised its dividend last year, its earnings have steadily declined over the years as demand for its postage mail-based products and services plummeted.
It was summarily banished from the list this year when its market cap dropped to $2.7 billion.
Meanwhile, only four newcomers were added this year.
But according to Money Morning Global Investing Specialist Martin Hutchinson there's only one of the freshly-minted Aristocrats that you should add to your portfolio right now – and some you should steer clear of.
"All you have to do is figure out which companies are run by sharpies – and are paying dividends out of capital – and which companies have genuinely solid business models that aren't going away," said Hutchinson.
Here's a look at each of the companies that made their debut in 2013, including the best one to buy.
Three New Aristocrats to Avoid
Pentair Ltd. (NYSE: PNR) is an industrial powerhouse that delivers products and services for water and other fluids. It also manufactures valves and controls for the oil and gas, power generation, and mining industries.
The company recently announced its 37th consecutive annual dividend increase as earnings per share increased 27% year over year.
But investors should be wary of investing in the Minneapolis-based giant if they're looking for a dividend stock, Hutchinson warns.
Even though earnings are growing, they still don't cover the regular quarterly cash dividend of $0.23 cents per share.
A company that is paying out more in dividends than it earns could be forced to cut its payout.
Abbvie Inc. (NYSE: ABBV),the spinoff of Abbott Laboratories (NYSE: ABT), will market the company's branded prescription drugs, including the blockbuster anti-inflammatory drug Humira and testosterone booster Androgel.
But while projected earnings will be more than enough to cover its dividend, Hutchinson would steer clear for now.
"Though in principal it's tempting, we just don't know enough about its prospects as an independent company to justify investing at this point," Hutchinson said.
Cardinal Healthcare Inc. (NYSE: CAH) distributes branded and generic pharmaceutical and consumer products to retailers, hospitals, and other healthcare providers.
Even though it has a rock-solid balance sheet, revenues have been decreasing lately.
And given the regulatory turmoil in the industry resulting from Obamacare, Hutchinson fears its earnings base could disappear. Therefore, investors should take a wait-and-see approach on the stock.
The Dividend Stock to Buy
Chevron Corp. (NYSE: CVX), the second-largest U.S. energy company, just raised its dividend for the 25th year in a row, qualifying as an Aristocrat for the first time.
And right on cue, the oil giant just reported blowout fourth-quarter numbers. Bolstered by downstream refining operations, profits jumped by 41% to a record $7.25 billion.
Meanwhile, operations from U.S. shale formations lowered crude costs and processing margins climbed a whopping 46%.
Chevron's global reach also bodes well, as crude prices rose in international energy markets. Roughly 75% of the company's crude is pumped from non-U.S. wells.
"Chevron is well run and global and should benefit from a further rise in oil prices, which I expect," Hutchinson says. "Also, Chevron's 28% payout ratio gives investors a lot of cushion."
If you'd like to learn more about increasing your gains from dividends, look no further than Martin Hutchinson's Permanent Wealth Investor service. Martin's Alpha Bulldogs have paid out thousands of dollars in sure-fire dividends, with an additional boost of significant capital gains.
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