10 Top Dividend Aristocrat Stocks To Buy In 2023

The term “dividend aristocrats” primarily refers to a series of S&P indices that screen for stocks that have increased their annual dividend every year for a number of years. The most popular of these is the index that tracks S&P 500 components that have raised their dividends every year for at least 25 consecutive years, which is tracked by the ProShares S&P 500 Dividend Aristocrats ETF (BATS:NOBL). Since I mostly look at dividend stocks outside the US, I prefer to compare this to S&P’s index of non-US companies that have increased dividends every year for at least 10 years, as tracked by the First Trust S&P International Dividend Aristocrats ETF (NASDAQ:FID). In this article, I will first take a look at NOBL and FID, then highlight five of my favorite stocks from NOBL and five of my favorites from FID, and explain why I like one FID component, Singapore Technologies Engineering, more than either ETF.

Dividend Aristocrats Performance

Given that NOBL currently holds only 65 of the 500 names in the S&P 500, and excludes many of the largest technology stocks that haven’t paid dividends for 25 years, one might expect performance of the NOBL portfolio to be significantly different than that of the overall S&P 500. However, when we look at the total return of NOBL’s index relative to the S&P 500 over a 10-year period, even the most recent 10-year period where names like Amazon and Tesla seemed to dominate the market’s moves, we see surprisingly little difference between NOBL and the broader index. The biggest divergence in this period seems to have occurred between March 2020 and the end of 2021, when COVID measures provided more of a boost to non-dividend paying technology companies like Amazon, but this has reversed over the past year.

We see a very similar pattern when we look internationally at the performance of the index underlying FID, compared with the broader S&P International 700 Index. Again, the biggest divergence seems to have occurred between March 2020 and the end of 2021, but over the whole 10-year period, performance of the two portfolios matched very closely.

The relative outperformance of the US benchmarks over the international benchmarks over this period can be explained by two factors:

• Dividend growth has been stronger in the US than overseas over the past 10 years, and
• Stock valuations have been getting more expensive in the US while they have not done the same internationally. In dividend terms, we see dividend yields have declined in the US, while they have remained high in foreign markets.

The 10-year dividend growth and yield chart for NOBL and FID, which both launched 10 years ago this year, were too noisy, so I instead illustrate the above two trends using this chart of two Vanguard funds tracking US and non-US markets:

This past 10-year performance record of NOBL and FID versus their broader benchmarks might beg two high level questions before we get into individual dividend aristocrat names:

1. Is there any advantage of buying dividend aristocrats instead of a broader market index? and
2. What is a good allocation to US vs international stocks given current valuations and fundamentals?

While many will disagree with me, my answer to the first question is a very clear yes. In my view, the past 10 years was almost a “worst case scenario” for investors prioritizing dividend quality over growth stocks, and if dividend aristocrats did no worse than the broader market over that period, they are likely to do as well if not better in many future scenarios. A second advantage in my view is that we can earn these returns with far fewer stocks, and I have increasingly come to believe in recent years that it is better to own a few dozen stocks you can understand than hundreds you don’t understand. A third and related advantage I see is a behavioral one related to performance measurement: when I buy a stock for dividend growth, I can easily see if the business is doing well based on whether the dividend hikes continue. For a non-dividend paying stock, it is much harder for me to interpret whether a price sell-off is justified, or whether I need to adjust the non-GAAP dividend reported, versus just comparing the change in the dividend. Back in 2020, I tested this idea using an old list of dividend achiever stocks from 1996.

On the second question, I believe the US outperformance of foreign stocks was a cycle lasting a decade and is likely to reverse, as it did in the 2000s. While I still aim to hold 25-35% of my overall portfolio in US assets and the rest in foreign assets, I especially want to take advantage of the current strength of the US dollar to pare my US allocation to the lower end of that range and put more in higher yielding overseas stocks.

With that introduction, let’s go through the five most interesting components I found in NOBL and the five most interesting I found in FID.

NOBL Pick #1: V.F. Corporation

The NOBL component that currently has the highest dividend yield is apparel maker V.F. Corporation (VFC), owner of many brands I see around the world including The North Face, Timberland, Jansport and Supreme. SeekingAlpha recently warned that VFC has a high risk of cutting its dividend, and VFC usually declares its first dividend of the year in late January, so I’d watch out for that. This name is down over 60% and probably yields over 7% for good reason, so I’d hesitate to buy it outright, and instead consider a call spread if I wanted a more tax-efficient way to play a possible recovery.

NOBL Pick #2: 3M Company

I last covered 3M Company (MMM) in August 2022, where I rated it a “hold”. It is the second highest yielding holding in NOBL whose business I can understand, and I continue to treat it more like a high yield bond than a true dividend growth stock. I have some covered calls on my MMM shares likely to expire worthless later this month, and I will likely roll those covered calls as a way of further enhancing my yield on this name.

NOBL Pick #3: Medtronic

Medtronic (MDT) is technically an Irish company, but has its primary listing in the US and remains an S&P 500 component. While this might raise some dividend withholding tax issues for non-US tax residents, I still very much like its business of medical devices and see this name as providing solid dividend growth at a very reasonable yield of 3.5%. MDT seems likely to declare another $0.68 dividend in March, and then I’ll set my calendar to May or June to see if it increases that quarterly dividend above $0.70.

NOBL Pick #4: Kimberly Clark

I like Kimberly-Clark Corporation (KMB) mostly because of the reach of its products I see overseas, but I currently have a larger position in its Mexican subsidiary Kimberly-Clark de Mexico (OTCPK:KCDMY) than in the parent company. Call me cheap, but I see KMB shares as expensive now that its yield has fallen back below 3.5%, so I am writing covered calls on my shares at these levels.

NOBL Pick #5: Coca-Cola

My last US dividend aristocrat pick with a dividend yield still above the 1.94% yield of NOBL is none other than the king of dividend kings, The Coca-Cola Company (KO), which currently trades at a yield of 2.8%. I wrote earlier about the future of KO’s dividend and about KO’s lost decades, and while I don’t believe KO is priced for another lost decade, I see more upside in its foreign bottling businesses than in the parent company. I hold a few shares of KO in my kids’ UTMA accounts, but I haven’t been buying shares of KO at these levels. KO’s 2028 bonds also yield too little above treasuries to be worthwhile, so while this is a name I love and will watch, it’s not priced attractively enough for me to buy and my earlier “Hold” ratings still hold.

FID Pick #1: BASF

German chemical giant BASF SE (OTCQX:BASFY) is the highest yielding component of FID I know and own, with a dividend yield currently above 7%. BASF has historically declared its annual dividend in February, and I’d watch to see if they keep it at EUR 3.40/share, or if they raise or cut it.

FID Pick #2: Link REIT

Hong Kong’s largest real estate investment trust, Link REIT (OTC:LKREF) is the owner of many shopping malls around Hong Kong where I used to shop at all the time when I lived there. Like many Hong Kong real estate names, this one was depressed by the extended border closures and COVID restrictions, and while I haven’t been back since December 2021, I’ll watch for this summer’s dividend distribution to see how polished the crown of this dividend aristocrat still is.

FID Pick #3: KT&G

I have long loved investing in tobacco, and am currently very interested in the Korean market for the attractive valuations and fundamentals there, so Korea’s largest tobacco company KT&G (OTCPK:KTCIF) was an easy pick from the list of FID holdings. It’s 2021 dividend was KRW 4,800 per share, and the same amount was declared in November for 2022 and went ex-dividend last week.

FID Pick #4: Singapore Technologies

Singapore Technologies Engineering Limited (OTCPK:SGGKY) is the only FID component from Singapore, a market I have long considered to be high quality and attractively priced. This company used to pay semi-annual dividends totaling S$0.15/share/year for several years, but started paying dividends quarterly in 2022 with a total dividend of S$0.22/share last year.

FID Pick #5: Takeda Pharmaceutical

Japanese drug maker Takeda Pharmaceutical (TAK) is the lowest yielding FID component I cared to look at with a dividend yield of “only” 4.4%, which is still higher than three of the five NOBL components looked at earlier. TAK’s dividend has actually been steady at 180 yen/share for each of the past five years, but as with many Japanese companies this year, I expect the weak yen will strengthen the bottom line of Japanese companies with significant sales outside Japan whether this translates into an immediate dividend hike or not. As the below table from TAK’s March 2022 annual report shows, almost half of TAK’s sales were in to the US where the dollar is very strong, so I’m optimistic about the impact of this in the March 2023 annual report.

Conclusion and Top Pick

I find a simple enhancement over simply buying NOBL or FID is to pick some of the highest yielding names from each of these funds’ holdings. By itself, this strategy of picking the highest yielders could be called the “dogs of the dividend aristocrats”, an idea tested with not-so-impressive results in this article. My preference is to instead pick high-yielding names whose businesses I can at least somewhat follow and understand, as I have done above. Of the above 10 names, there are only two I do not own, Link REIT and KT&G, and that is simply because I own other names similar to these two that I like better but that aren’t FID components.

If I had to make a top pick out of the above 10 names, mine would be the one that currently has the largest weight of the above 10 in my portfolio: SGGKY. I very much like Singapore’s position between India, China, and Southeast Asia, and the aerospace, security, and smart city technologies this company is working on is giving me plenty of interesting reading assignments. Most importantly, I see last year’s dividend increase as a clear bullish sign, and I am keen to earn more of this company’s dividend growth.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.