Dividend aristocrats: What they are and where to find them

Glenn Freeman

Livewire Markets

What’s an aristocrat? For me, the term conjures stereotypes of high-born wealth. And, curiously, a line from the famous Johnny Cash song Folsom Prison springs to mind: “I bet there's rich folks eating in a fancy dining car, they're probably drinkin' coffee and smoking big cigars.”

Not to get too technical, but it’s actually a term derived from the Greek words “Aristos” (best) and “kratos” (rule). Aristocrats were the ruling class; the supposedly best and noblest people. This is where our interest in the term “dividend aristocrats” starts.

Dividend aristocrats are a unique set of companies that have been able to increase their dividends every year for a quarter-century. Other criteria are:

  • A market cap of at least US$3 billion
  • An average daily trading value of at least US$5 million for three months before the last rebalancing

There are several of these lists in the US, but Standard & Poor's is the best-known. This list includes around a 20% weighting to industrials, alongside double-digit percentage exposures to consumer staples, materials, financials and healthcare.

The top 10 in the list of 65 qualifying companies includes:

  • Nucor, the US’s largest steel producer
  • Heavy machinery manufacturer and distributor Caterpillar
  • Aerospace and defence company General Dynamics
  • Oil and gas exploration and production company Exxon Mobil.
We don’t have any dividend aristocrats in Australia’s listed universe. But there are several firms that come very close to meeting the classic definition.

I recently spoke with a wealth manager who helps clients find sources of income, and a couple of portfolio managers who oversee income-focused funds.

Todd Hoare, head of equities at Crestone Wealth Management, suggests Australia’s imputation system means that dividends make up a higher proportion of overall total returns than they do in other regions.

“In terms of Australian companies that have increased dividends annually for at least 25 years, there aren’t any,” Hoare says. “But there are several companies with an enviable track record of maintaining or increasing their dividends over long periods of time, particularly if you overlook the effect of the COVID-disrupted 2020.”

Ramsay Health Care (ASX: RHC) – the private hospital operator has increased dividends every year, at a 11% compound annual growth rate since 2000, with the exception of last year, when COVID forced the company to omit its August 2020 final dividend.

CSL Limited (ASX: CSL) – Australia’s mammoth biotechnology company isn’t typically known for its dividend yield qualities. “But it’s another of the truly great income providers in the history of Australian listed companies,” says Hoare. CSL has delivered uninterrupted dividend growth since its IPO in 1994.

Other companies that have been able to at least consistently grow dividends year-on-year are:

  • Washington H Soul Pattinson (ASX: SOL) – from its grassroots in owning and operating pharmacies in Australia, WHSP is now a diverse investment house spanning a range of industries including the mining, building materials, telecommunications, retail, agriculture and property sectors. As chairman Rob Milner recently told CommSec economist Tom Piotrowski, “we’ve never missed a dividend since we listed in 1903.”
  • ARB Corporation (ASX: ARB) – this manufacturer of four-wheel-drive accessories is highlighted by several Australian fund managers, including Roger Montgomery of Montgomery Investment management and First Sentier Investors’ Dawn Kanelleas. Even in the midst of the pandemic, management held its dividend at the same pre-pandemic level, paying out the same 39.5 cents a share it did in 2019-2020.
  • Building materials company Brickworks (ASX: BKW), as Hoare emphasises, has at least maintained - and often increased - its dividend every year since 1976. Market Matters’ James Gerrish recently mentioned the company’s attractive fully-franked yield of around 3%. 
  • Natural gas infrastructure company APA Group (ASX: APA) also boasts an impressive payout history, having maintained or increased its dividend every year since 2003.
  • Although it can’t claim a 25-year track record, fast-food retailer Domino’s Pizza (ASX: DMP) has maintained or increased its dividend every year since 2005.
  • And in listed property, Goodman Group (ASX: GMG), an industrial property A-REIT with favourable long-term tailwinds, has been able to steadily increase its dividend every year since 2010.
  • A growth technology firm also makes Hoare’s list, financial adviser platform company Iress Market Technology (ASX: IRE) displaying an “uninterrupted track record of at least maintaining its dividend since 2000 if you allow for the company’s two-for-nine rights issue associated with its 2013 UK acquisition,” he says.

A slightly younger company, in terms of when it listed on the ASX, also makes the local grade for Hoare. The long WALE (weighted average lease term) A-REIT Charter Hall (ASX: CLW) “has all the hallmarks of being able to steadily increase its dividend over a long period of time,” says Hoare.

Merlon Capital Partners CEO and portfolio manager Neil Margolis gives a broader view on the types of local companies more likely to become dividend aristocrats. “Several healthcare stocks have consistently grown dividends, albeit from low levels,” he says.

“Even though many of these stocks have done well, capital is more likely to be preserved in dividend-paying companies if the company is undervalued relative to its underlying cash flows and the market is overly pessimistic on its risk profile or growth prospects,” Margolis says.

“Low interest rates have increased the share prices of many stocks with perceived growth certainty so these might not prove to be as good investments as they have been if interest rates return anywhere near historic levels.”

Dan Bosscher, a portfolio manager at Perennial Asset Management, has a particularly long-term bullish view on dividends from some of Australia’s mining stocks. But before delving into a few of his dividend picks, Bosscher explains why he thinks Australia doesn’t match the US in having the same number – or any, technically – dividend aristocrats.

“Maybe one of the reasons why there aren’t any companies who’ve grown dividends for 25-years straight is because we’re so heavily weighted to financials and resources, given the first has a cyclical bent, and the other is entirely cyclical,” he says.

“Those names that have produced long-term dividend growth over the longer-term seem to sit in healthcare and are also some of the discretionary retailers.

A few names he singles out are:

  • Consumer electrical goods retailer JB Hi-Fi (ASX: JBH)
  • Biotechnology firm CSL Limited (ASX: CSL)
  • Manufacturer and distributor of respiratory systems and consumables, Fisher Paykel Healthcare (ASX: FPH).

“They may not have 25 years of dividend growth, but they’re very consistent over 15 years,” says Bosscher.

“And if I screen over the past five years, I get a long list of materials companies.”

One of these is BHP Group (ASX: BHP), which if you exclude the 2015-16 resources downturn, has delivered solid dividend returns. Other names in the sector that he names for the same reasons are:

  • Iron ore miner Fortescue (ASX: FMG)
  • Iron ore, lithium and manganese miner Mineral Resources (ASX: MIN)
  • Rio Tinto (ASX: RIO), which focuses primarily on extracting iron ore and copper
  • Gold miner Evolution Mining (ASX: EVN)
  • South32 (ASX: S32), the BHP spinoff company, which mines steelmaking materials and thermal coal for power stations
  • Gold miner Newcrest (ASX: NCM).

“Some Australian industrial companies are also long-term, consistent payers,” says Bosscher, citing building materials company James Hardie (ASX: JHX) and gaming company Aristocrat Leisure (ASX: ALL).

“There’s a smattering of consistent growers over the years, and you’d put the more reliable, longer-term payers mostly in the healthcare and discretionary retail buckets,” he says.

Materials companies have shown the highest yield growth in recent years, largely because of high iron ore prices, but they’ve also displayed longer-term growth.

Why have miners done so well?

Miners have a quite stark choice to make between capex and returning capital to shareholders.

“Big miners have been guilty in the past of pursuing large capex that hasn’t paid off, which has hit their balance sheets and in turn affected their ability to pay dividends when the inevitable downturn comes,” Bosscher says.

“But the market has said these companies need to be more careful with their capital allocation, to be more consistent with shareholder returns.

“They’re now spitting out so much free cash flow because commodity prices have been so high.”

Bosscher is confident this situation will continue, as long as resource companies don’t head off on spending sprees. “Though you could say commodities is probably due CAPEX in some spots, I wouldn’t be concerned about their ability to keep paying dividends,” he says.

Bosscher singles out BHP as a classic example of a company that shored up its balance sheet in recent years, having rushed to give more certainty to investors. This paid off when the pandemic hit, as investors quickly crossed off their buy list any companies whose debt levels meant they couldn’t survive a prolonged shutdown.

“Part of the reason commodities equities have done so well since COVID is because of the balance sheet and the multiple – you could buy BHP at 7-times EBITDA, so not only is the balance sheet good, it’s cheap as well,” Bosscher says.

“I think that then fed into the whole value rally, the end of the ‘Value versus Growth’ argument that we’ve had for so long.”

This article follows on from a recent three-part series that also focused on dividends.

1. Finding sustainable sources of investment income
2. Why franking credits underpin Aussie dividends
3. Know your enemy: defining (and dodging) dividend traps

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Glenn Freeman
Content Editor
Livewire Markets

Glenn Freeman is a content editor at Livewire Markets. He has around 10 years’ experience in financial services writing and editing, most recently with Morningstar Australia. Glenn’s journalistic experience also spans broader areas of business...

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