Income investors are always on the lookout for stocks with a proven track record of dividend raises, such as the Dividend Aristocrats. However, there is potential to make even more money by investing in companies that are on the cusp of becoming Aristocrats, before they have reached the 25-year mark of dividend growth. These companies may still have room for significant dividend increases, unlike some mature Aristocrats whose growth may have stagnated.
One such example is Fastenal, which recently became an Aristocrat in 2024 after reaching 25 years of dividend growth. Investors who bought Fastenal before it joined the ranks of Aristocrats saw an 81% increase in dividends over a five-year period. This demonstrates the potential for higher income growth by investing in companies earlier in their dividend growth trajectory.
Companies like Nike, Lockheed Martin, Qualcomm, Southern Co., and Eversource Energy are on the brink of becoming Dividend Aristocrats. Each of these companies has a strong track record of consecutive dividend increases and offers attractive dividend yields. For example, Nike has been doubling its sales and profits in recent years, while Lockheed Martin benefits from the uptrend in defense spending. Qualcomm, a communications chipmaker, has delivered exceptional total returns since its IPO in 1991.
While these companies show potential for becoming Aristocrats and improving dividend growth, each also faces challenges. Nike has been affected by supply chain issues and competitor pressure, while Qualcomm struggled in 2018. Southern Co. and Eversource Energy, utility companies with steady dividends, may face slower growth due to their already high payout ratios. However, Eversource Energy has shown strong dividend growth over the past five years, despite recent struggles with wind energy investments.
Investors looking for opportunities to build a strong, income-generating portfolio may consider investing in companies that are approaching Dividend Aristocrat status. These companies offer the potential for significant dividend growth and stable returns over the long term. By targeting companies that are on the verge of Aristocracy, investors can capitalize on the early stages of dividend growth and potentially achieve higher income growth compared to mature Aristocrats. As always, it is essential to conduct thorough research and consider the challenges and opportunities each company may face.
