Despite the pandemic, the S&P 500 has nearly doubled off its bottom last year and is now trading at new all-time highs. Consequently, it has become hard for income investors to identify reasonably valued stocks with attractive dividends. The Dividend Aristocrats, the S&P 500 stocks that have raised their dividends for at least 25 consecutive years, have many advantages for income investors. In this article, we will analyze the merits of investing in the Dividend Aristocrats, including the three highest-yielding Dividend Aristocrats in 2021, namely Exxon Mobil (XOM), Chevron (CVX) and AbbVie (ABBV).
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The Advantages of Dividend Aristocrats
Dividend Aristocrats have raised their dividends for at least 25 consecutive years. Companies need to have a durable competitive advantage, such as an exceptionally strong brand or engagement in niche markets, with weak competition, in order to achieve such long dividend growth streaks. Therefore, those who invest in this group of stocks gain exposure to companies with robust business models.
Moreover, as the last 25 years include two fierce recessions—the Great Recession in 2009 and the pandemic-driven recession in 2020—it is evident that Dividend Aristocrats are resilient to recessions. During those severe recessions, many companies saw their earnings collapse and cut or suspended their dividends. Only the most resilient ones were able to keep raising their dividends. Resilience to recessions is paramount for income investors, who seek a reliable income stream.
Another advantage of investing in the Dividend Aristocrats is the growing income stream they pay to their shareholders. As retirees face the challenge of inflation, a growing income stream that keeps up with inflation is paramount. Moreover, investors who have not reached their retirement phase can reinvest a growing amount on this group of stocks and reap the benefits of compounding.
3 Highest-Yielding Dividend Aristocrats in 2021
High-Yield Dividend Aristocrat #1: Exxon Mobil
Exxon Mobil is the largest oil and gas company by market capitalization. It produces oil and natural gas at a 60/40 ratio, and it is one of the most integrated oil majors, with significant contribution from its refining and chemicals segments.
Thanks to its integrated business model, Exxon used to be the most resilient oil major to recessions. However, this did not prove to be the case last year, in the severe recession caused by the coronavirus crisis. Due to the collapse in the global demand for refined products and chemicals, these two segments incurred nearly record-low margins and hence they did not provide any support to the results of the oil giant. In addition, the price of oil temporarily collapsed and thus the upstream segment suffered severely. To cut a long story short, Exxon encountered a perfect storm last year and thus posted its first loss in more than a decade.
Exxon has also disappointed investors in another way. It is the only oil major which has failed to grow its production for more than a decade, in sharp contrast to its peers, which have significantly grown their output in the last four years.
On the bright side, Exxon has two strong growth drivers, its reserves offshore Guyana and the Permian Basin. Guyana is one of the most exciting projects in the oil industry. Exxon has nearly tripled its reserves in the area, from 3.2 billion barrels in early 2018 to nearly 9.0 billion barrels now. The company also expects to grow its output in the Permian Basin, from 400,000 barrels per day this year to 700,000 barrels per day in 2025. Thanks to these two growth drivers, Exxon was expecting until recently to grow its production from approximately 3.8 million barrels per day to 5.0 million barrels per day until 2025.
However, Exxon has indefinitely postponed other growth projects, such as the $30 billion Mozambique LNG export project, in order to improve its cash flows and defend its dividend. In 2020, Exxon posted negative free cash flows of -$1.3 billion. Given also its $14.9 billion of annual dividend payments, it is evident that the oil giant faced a huge cash flow deficit last year. Many analysts were expecting a dividend cut from Exxon due to this deficit, but the oil major maintained its dividend. It also decided to sacrifice some growth projects in order to defend its dividend. However, this decision will come at a cost, as management now expects flat production for another four years.
On the other hand, Exxon is currently offering a 5.75% dividend yield, which is the highest yield among Dividend Aristocrats. The payout ratio stands at 97%, thus signaling that Exxon Mobil is struggling to maintain its dividend. However, as the pandemic is likely to subside later this year, Exxon is likely to defend its multi-year dividend growth streak, particularly given its commitment to its dividend. Overall, its dividend can be considered safe in the absence of another downturn, but the absence of production growth remains a concern.
High-Yield Dividend Aristocrat #2: Chevron
Chevron is the third-largest oil major by market capitalization, behind only Royal Dutch Shell (RDS.B) and Exxon. In both 2018 and 2019, Chevron generated 78% of its earnings from its upstream segment, though this segment posted losses last year due to the pandemic. While most oil majors produce crude oil and natural gas at approximately equal ratios, Chevron is more leveraged to the oil price, with a 61/39 production ratio.
Moreover, as it prices a significant portion of its natural gas volumes based on the oil price, about 75% of its total output is priced based on the oil price. As a result, Chevron is more leveraged to the price of oil than the other oil majors.
Due to its high exposure to the oil price, Chevron used to be one of the most vulnerable oil majors to downturns. In the downturn caused by the collapse of the oil price from $100 in mid-2014 to $26 in 2016, Chevron saw all its earnings evaporate, in contrast to Exxon and Total (TOT).
However, Chevron learned its lesson well from that downturn and drastically improved its asset portfolio, by adding low-cost, high-margin barrels while divesting low-return reserves. Thanks to the high-grading of its portfolio, Chevron proved quite resilient in the fierce downturn caused by the pandemic last year.
In sharp contrast to the vast majority of oil companies, Chevron posted a minor loss of only -$0.20 per share last year. Even better, it achieved free cash flows of $5.6 billion and thus covered 58% of its annual dividend payments. This helps explain why there were no analysts calling for a dividend cut of Chevron whereas many analysts were expecting a dividend cut from Exxon.
In fact, Chevron raised its dividend by 8% last year and by another 4% this year. Chevron has thus raised its dividend for 34 consecutive years. The stock is currently offering a 5.1% dividend yield.
Thanks to the high-grading of its portfolio, Chevron has stated that its dividend is safe even in the unlikely scenario of Brent prices of $40 for a prolonged period. In such an adverse 5-year scenario, the company expects to add some debt and cover its dividend. On the contrary, in the favorable scenario of 5-year average Brent prices of $60, Chevron expects to generate more than $25 billion in excess cash flows over this period. Overall, Chevron’s dividend seems safe for the foreseeable future.
High-Yield Dividend Aristocrat #3: AbbVie
AbbVie is a biotechnology company focused on developing and commercializing drugs for immunology, oncology and virology. AbbVie was spun off by Abbott Laboratories (ABT) in 2013.
Since 2013, AbbVie has grown its earnings every single year. In fact, it has more than tripled its earnings per share, from $3.14 in 2013 to $10.56 in 2020. Even last year, which was marked by the unprecedented global recession caused by the pandemic, AbbVie grew its earnings per share 18%, from $8.94 to an all-time high of $10.56.
Moreover, AbbVie acquired Allergan last year. This acquisition is likely to contribute significantly to the growth of the company. The U.S. toxins market grew 30% in the first quarter of this year. Of course, a portion of this growth should be attributed to pent-up demand after the recession, but this business has many years of material growth ahead.
AbbVie stock is currently trading at a price-to-earnings ratio of only about 9.0. The cheap valuation of AbbVie is certainly surprising, particularly given the exceptional growth record of the company.
However, there is a good reason behind the cheap valuation of the stock, namely the expiration of the patent of Humira in the U.S. in 2023. Humira, which is a drug against rheumatoid arthritis, is the most potent drug of AbbVie. To provide a perspective, Humira generated 43% of the total revenue of the company last year. The patent of the drug expired in Europe in late 2018 and thus its sales decreased 31% in 2019 and 14% in 2020.
On the bright side, AbbVie generates approximately 90% of its sales from Humira in the U.S. and hence the effect of lower sales in Europe hardly affected the total results of the company. However, it is reasonable to be concerned over the effect of the expiration of the patent in the U.S. in two years.
The company is doing its best to ensure for a smooth transition. The company has two other auto-immune drugs in its portfolio, Rinvoq and Skyrizi. These two drugs are likely to make up for a significant portion of the expected lost revenues of Humira after the expiration of its patent and should mitigate the effect.
AbbVie is now offering a 4.6% dividend yield, which is the third-highest yield in the group of Dividend Aristocrats in 2021. Given the healthy payout ratio of 42% and the resilience of this high-quality biotechnology company to downturns, the dividend should be considered safe for the foreseeable future.
The Dividend Aristocrats are an ideal group of stocks for income investors thanks to the unique advantages of these stocks. This is particularly true in the current investing environment, which is characterized by elevated stock market valuations. By comparison, these 3 Dividend Aristocrats have much lower valuations and significantly higher dividend yields, plus the benefit of long-term dividend growth.
Disclosure: Members of the Sure Dividend Team are long some of the stocks mentioned.
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Aristofanis Papadatos applies fundamental and technical analysis and mainly use options as a tool for both investing and trading. He writes extensively on Seeking Alpha and is also a member of the Sure Dividend team. He is the author of two mathematics books ("Arithmetic calculations without a calculator" and "Word Problems").