Royal Investing: 3 High Yield Dividend Aristocrats

Where can you find extremely high-quality dividend stocks with high yields? We like to start hunting the Dividend Aristocrats. This is a group of just 66 stocks in the S&P 500 that have dividend increase streaks of at least 25 years.

With that sort of longevity, we can be assured the companies’ business models can stand the test of competition, recessions, and technological changes that inevitably occur. Starting with this list of Dividend Aristocrats and narrowing it down to the higher-yielding ones can produce truly great dividend stocks. Below, we’ll take a look at the three highest yielding Dividend Aristocrats now.

Think IBM: Dividend Yield: 5.0%

IBM (IBM) is a global information technology company that provides software, hardware, and related services. IBM’s focus is running mission critical systems for large, multi-national customers and governments. IBM typically provides end-to-end solutions. IBM completed its spinoff of Kyndryl at end of 2021, which was reported as discontinued operations. The company reorganized its remaining business units into three operating segments: Software, Consulting, and Infrastructure.

In the 2022 second quarter, company-wide revenue increased 16%, while diluted adjusted earnings per share rose 43% to $2.31 from $1.61 on a year-over-year basis. Diluted unadjusted earnings per share rose 79% to $1.61 in the quarter from $0.90 in the prior year. Revenue for software increased 12% for the quarter, due to 9% growth in “Hybrid Platform & Solutions” and a 19% increase in transaction processing.

Revenue was up 17% for RedHat, 8% for automation, 4% for data and artificial intelligence, and 5% for security. Consulting revenue increased 18% last quarter, due to 16% rise in business transformation, 23% growth in technology consulting, and 17% growth in application operations. The book-to-bill ratio is a healthy 1.1-times. Revenue for infrastructure was up 25% for the quarter, due to a 41% rise in hybrid infrastructure and 5% growth in infrastructure support. Z Systems had 77% growth.

IBM continues its higher pace of acquisitions with Envizi, Sentaca, Neudesic, Randori, and expanding its expertise and offerings. IBM forecasts revenue growth in the high single digits and free cash flow of about $10 billion in 2022.

IBM’s competitive strength is its brand, entrenched customer relations and extensive patent portfolio. IBM is also the market leader in mainframe computers where it has 90% of the market and little competition. The nature of mission critical IT enterprise systems and software makes this unlikely to change in the near future.

The company is deleveraging after increasing debt for acquiring Red Hat. Debt is down around $22 billion since the acquisition and core debt is now $38.0 billion and is offset by $7.8 billion in cash, equivalents, and securities. With a dividend payout ratio of 67% expected for 2022, we view IBM’s high dividend payout as secure.

An Alliance With Walgreens: Dividend Yield: 4.8%

Walgreens Boots Alliance (WBA) is the largest retail pharmacy in both the United States and Europe. Through its flagship Walgreens business and other business ventures, the $36 billion-market-cap company has a presence in more than nine countries, employs more than 315,000 people and has more than 13,000 stores in the U.S., Europe and Latin America.

In the most recent quarter, sales from continuing operations dipped 4% and adjusted earnings-per-share decreased 30% over the prior year’s quarter, from $1.37 to $0.96, mostly due to peak Covid-19 vaccinations in the prior year’s period. EPS exceeded analysts’ consensus by $0.03. The company has beaten analysts’ estimates for eight consecutive quarters. Walgreens reiterated its guidance for low-single digit growth of its annual EPS. But the stock has plunged 25% this year, due to concerns over the fading tailwind from the pandemic (only 4.7 million vaccinations in the third quarter vs. 11.8 million in the second quarter).

From 2011 through 2021, Walgreens grew EPS by 7.2% per annum. This was driven by a combination of factors including solid top-line growth ($72 billion to $132 billion), a steady net profit margin and a reduction in the number of shares outstanding.

Over the intermediate term, we expect 3% earnings-per-share growth, expecting some sort of recovery toward “normal,” but also taking into account the fading tailwind from Covid-19 vaccinations. This includes modest growth for fiscal 2022, with improvements coming in the years thereafter. Over the long-term, an aging population and a focus on becoming a health destination should provide tailwinds.

Walgreens’ competitive advantage lies in its vast scale and network in an important and growing industry. The payout ratio remains reasonable, at under 40% expected for 2022.

Try on V.F. Corp.: Dividend Yield: 4.3%

V.F. Corporation (VFC) is one of the world’s largest apparel, footwear and accessories companies. Its brands include The North Face, Vans, Timberland and Dickies. The company, which has been in existence since 1899, has a market capitalization of $17.6 billion and has generated nearly $12 billion in sales in the last 12 months. The company has increased its dividend for 49 consecutive years.

In late July, V.F. Corp reported financial results last month for the first quarter of fiscal 2023. (V.F. Corp’s fiscal year ends the Saturday closest to March 31.) Revenue and organic revenue grew 3% and 7%, respectively, over the prior year’s quarter, driven by the emerging markets and North American regions, which experienced a negative impact from the pandemic in the prior year’s period. However, adjusted EPS declined from $0.28 to $0.09 and missed analysts’ consensus by $0.05, mostly due to high expense inflation and lockdowns in China. For the fiscal year, V.F. Corp expects revenue growth of at least 7% but lowered its guidance for adjusted EPS from $3.30-$3.40 to $3.05-$3.15. We have thus lowered our forecast from $3.38 to $3.10.

Through fiscal 2019, V.F. Corp had grown EPS by an average compound rate of 10.5% per annum. This result was driven by strong sales growth (basically doubling) along with a solid uptick in the company’s operating and net profit margins. Continued success can come from these areas, but there could be enhanced volatility due to the company becoming more of a “pure play” provider. In addition, the Covid-19 pandemic caused a 51% plunge in EPS in 2020. But the company has recovered strongly from the pandemic. We expect it to grow its bottom line by 7.0% per year on average over the next five years.

V.F. Corp has raised its dividend for 49 consecutive years. We expect the company to maintain its exceptional growth streak for many more years.

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