Canadians can recognize the names of most of the big, blue-chip U.S. companies that have long track records as dividend payers. Names such as McDonald’s Corp., Coca-Cola Co., Johnson & Johnson and Exxon Mobil Corp.
In the vast sea of U.S. equities, however, there are many names with similar dividend legacies that may fly completely under Canadian investors’ radar, such as Donaldson Co. Inc., Lancaster Colony Corp., or New Jersey Resources Corp.
We did not select those names for you. Standard & Poor’s did. S&P’s indexes division maintains two U.S. “aristocrats” indexes of companies that have raised their dividend payments every year for years on end. One, the S&P 500 Dividend Aristocrats index, is composed of members of the S&P 500 with 25 consecutive years of dividend increases.
The other – and the one that we look to today – is the S&P High Yield Dividend Aristocrats index. Despite the inclusion of “high yield” in its name, it has no minimum dividend yield for inclusion. Instead, it dips further down to consider members of the S&P Composite 1500 that have increased dividends for 20 years in a row. The combination of a larger pool that includes smaller companies, and the slightly shorter required track record, means the High Yield Dividend Aristocrats index picks up stocks that rarely make headlines – but perhaps should, given their payout history. (S&P also has a Canadian Dividend Aristocrats index, with much less stringent criteria.)
(S&P also has a Canadian Dividend Aristocrats index, with much less stringent criteria, that was the focus of an article in Thursday’s Globe. Read it here.)
“The appeal of saying, ‘This company has been raising its dividend for  years,’ people love that,” says David Blitzer, managing director of S&P Dow Jones Indices and chairman of the index committee. “You can have six different financial tests about coverage ratios and earnings growth and all kinds of stuff, and everybody will yawn. But you tell them  years and they love it. They think it’s a much more reliable indicator.”
Canadians can buy the batch via a Canadian ETF, the loonie-hedged iShares U.S. Dividend Growers Index ETF (CUD). The fund yields 2.02 per cent and has an expense ratio of 0.67 per cent, according to Morningstar. As in the index, the stocks are weighted by dividend yield, so the higher payers contribute more to returns.
Down 4.65 per cent over the past 12 months, it has just a one-star rating, primarily because it’s hedged and Canadian investors aren’t getting the benefit of U.S. assets being translated into seemingly ever-higher amounts of Canadian dollars.
“Returns are being compared to a category of mostly unhedged funds, which have benefited mightily from the Canadian dollar’s fall,” says Christopher Davis, Morningstar’s director of manager research for Canada. “The comparison isn’t quite fair. Investors should consider performance in the context of its strategy. If you bought the ETF looking for U.S. equity exposure without the currency risk, you’re getting what you’ve paid for.” (A U.S. ETF, SPDR Dividend [SDY], allows Canadians to benefit from the falling loonie.)
However, the investor in individual equities can get some interesting leads from the index, particularly from the nine companies added in the annual rebalancing this week. International Business Machines Corp. is the best-known (the company cut its dividend in 1993 in former chief executive officer Louis Gerstner’s first year, then managed to raise it in 1996, beginning the two-decade run that got it added this week.) Another, NextEra Energy Inc., is, like IBM, in the S&P 500.
The remaining seven are outside the S&P 500.
In the industrial sector, Minneapolis, Minn.-based Donaldson Co. sells filtration systems and other engine parts. Lincoln Electric Holdings Inc. is a Cleveland-based seller of welding products to a wide range of industries, including energy exploration, shipbuilding and auto making. They both yield 2.4 per cent.
Two insurers got the call: RLI Corp., a Peoria, Ill.-based seller of property and casualty insurance, and RenaissanceRe Holdings Ltd., a Bermuda-based company that sells reinsurance, an insurance product for other insurers that want to manage risk. RLI has the biggest yield of the new additions at 4.6 per cent; RenaissanceRe has the lowest, at 1.1 per cent.
Minnesota-based Polaris Industries Inc. may be well known to shoppers considering snowmobiles, as it is one of the main competitors of Canada’s BRP Inc. in winter recreation and off-road vehicles. The stock yields 2.8 per cent.
Surprisingly, just one of the additions is a utility. New Jersey Resources Corp. has about 500,000 natural-gas customers in its eponymous state, as well as a solar-and-wind division with properties in a handful of states. Its stock yields 2.8 per cent.
Columbus, Ohio-based Lancaster Colony Corp. is a 55-year-old food company with a collection of regional brands, with Marzetti salad dressing perhaps the best known. As a contract manufacturer, it has a couple of alliances with bigger names: It also makes Olive Garden salad dressing and Jack Daniel’s mustards for supermarket sales. It yields 2 per cent.
There’s a caveat to buying these names, particularly compared with the Canadian Dividend Aristocrats. S&P’s rules for Canada require just five years of dividend-raising, meaning the companies are younger and closer to the beginning of what could be a multiyear path of higher payouts. The U.S. names, with their 20-year track record, are more mature and less likely to be in growth mode. Analysts’ views on these names reflect that, with plenty of “hold” recommendations to be found.
Investors, then, should expect the dividend to be a significant component of their returns, with price appreciation less likely than with some younger companies. But given the companies’ long-term track records of dividend increases, they should have confidence that the management of these companies have figured out ways to consistently share their profits.
S&P High Yield Dividend Aristocrats index: New additions
The S&P high-yield dividend aristocrats index includes plenty of U.S. names that Canadian investors may not be familiar with, because it dips down below the S&P 500 index and considers the smaller companies in the S&P 1500. To get in, companies must have increased their dividends for 20 consecutive years. Here are the nine companies added in the annual rebalancing this week:
Net debt is debt minus cash. Negative numbers mean company has more cash than debt. Revenue, EBITDA and net income are for the past 12 months. EBITDA is earnings before interest, taxes, depreciation and amortization. P/E is based on analysts’ estimates of future earnings.
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- S&P 500 INDEX2,146.10-18.59(-0.86%)
- McDonald's Corp$116.530.00(0.00%)
- Coca Cola Bottling Co Consolidated$144.500.00(0.00%)
- Johnson & Johnson$117.780.00(0.00%)
- Exxon Mobil Corp$83.060.00(0.00%)
- Donaldson Company Inc$36.920.00(0.00%)
- Lancaster Colony Corp$131.320.00(0.00%)
- New Jersey Resources Corp$34.450.00(0.00%)
- ProShares S&P 500 Dividend Aristocrats ETF$53.750.00(0.00%)
- iShares US Dividend Growers Index ETF (CAD-Hedged)$35.880.00(0.00%)
- International Business Machines Corp$153.980.00(0.00%)
- NextEra Energy Inc$126.230.00(0.00%)
- Lincoln Electric Holdings Inc$61.520.00(0.00%)
- RLI Corp$67.760.00(0.00%)
- Renaissancere Holdings Ltd$119.740.00(0.00%)
- Polaris Industries Inc$74.080.00(0.00%)
- BRP Inc$25.990.00(0.00%)
- iShares S&P TSX Canadian Dividend Aristocrats Index ETF$24.950.00(0.00%)
- Updated September 25 8:00 PM -4GMT. Delayed by at least 15 minutes.