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3 Dividend Aristocrats That Let You Sleep Well at Night

Motley Fool - Tue May 17, 6:00AM CDT

No one likes losing money. But a silver lining of bear markets is that they put fundamentals to the test while adding pressure on companies to prove they can put up strong results even during a challenging time. In this sense, bear markets can provide a stress test on companies. The downward movement in stock prices isn't fun in the short term. But long-term investors can catch a valuable glimpse into how the market views their companies' resilience during a potential recession.

Over the past four years, we've seen three bear markets: the fall 2018 U.S.-China trade war-induced sell-off, the pandemic-induced bear market of spring 2020, and the bear market we're currently in. Through it all, share prices of Sherwin-Williams(NYSE: SHW), Linde (NYSE: LIN), and Roper Technologies(NYSE: ROP) have held up incredibly well, with all companies continuing to put up impressive results. What's more, all three companies are Dividend Aristocrats, S&P 500 components that have paid and raised their dividends for at least 25 consecutive years. Here's what makes each stock a great buy now.

Two people sit on a tarp and look up at a white wall with blue paint smeared in a messy fashion.

Image source: Getty Images.

Prime your portfolio with this reliable paint company

Daniel Foelber (Sherwin-Williams): Folks may know Sherwin-Williams for its flagship name-brand paint. But the company also operates a large industrial paint and coatings division, as well as a consumer brands segment that sells products under labels outside of Sherwin-Williams.

The company has been a long-term outperforming stock as it continues to grow market share and tap into a larger customer base. Sherwin-Williams' performance held up very well during 2020, as a spike in do-it-yourself projects and a booming housing market helped offset declines from its industrial segment. But with the housing market cooling off, there's concern that Sherwin-Williams' growth could slow.

However, the numbers speak for themselves. And the company is still guiding for full-year 2022 adjusted earnings per share of $9.25 to $9.65 -- giving it a forward price-to-earnings ratio of around 28. That valuation is not cheap by any means. It's a similar pattern we're seeing with other safe dividend stocks, in that investors would rather pay a premium price for a company they can count on than get trapped in a speculative stock that seems to just keep falling with no end in sight.

However, there are many reasons Sherwin-Williams has earned a premium valuation. Its guidance would entail more than 15% earnings growth over 2021. What's more, Sherwin-Williams consistently sports a high operating margin -- particularly for a company of its size and in its line of work. The company's 2021 operating margin was 13.4%, slightly above its 10-year median operating margin of 12.3%.

Sherwin-Williams' impressive profitability is a sign that its margins could take a hit in response to rising inflation without derailing its performance of its ability to support its dividend and share repurchases. All told, Sherwin-Williams is the leader in its field. Although expensive, the stock is certainly one that investors can count on in the long term.

To cure that insomnia, try hitting the gas

Scott Levine (Linde): Tossing and turning at night because market volatility is keeping you from grabbing some shut-eye? It's understandable -- even the most experienced investors can feel that their resolve has been shaken by the wild ups and downs. But the commitment to the investments in your portfolio doesn't mean you have to wake up bleary-eyed every morning. In fact, fortifying your holdings with a tried and true Dividend Aristocrat like Linde is a sound approach to help you sleep soundly.

A leading provider of industrial gases, Linde provides a critical resource to a variety of businesses. From the oxygen it provides to the fish farming industry, to the high-purity gases it provides to electronics manufacturers, to the hydrogen it produces to help power buildings, Linde's expertise in providing industrial gases is sought by a wide variety of customers in various industries.

Increasing its payout for 28 consecutive years, Linde offers investors a dividend that has a forward yield of 1.55%. Granted, it's not a high-yield darling, but risk-averse investors looking to buttress their portfolios with a safer option will be attracted to Linde. For one, the company has consistently sported a conservative payout ratio. Over the past decade, for example, Linde has averaged a conservative payout ratio of 54%. And that's not the only indication that management isn't willing to imperil the company's financial health for a hefty distribution.

LIN Free Cash Flow Per Share (Annual) Chart

LIN Free Cash Flow Per Share (Annual) data by YCharts.

From a different perspective -- with regard to the cash flow statement -- it's clear that the company's dividend is sustainable. Linde generates a significant amount of free cash flow, a competency that's likely to afford the company the ability to continue its streak of raising its dividend.

One of the best-run companies in America

Lee Samaha (Roper Technologies): I know what you are thinking, and you'd be right. Roper's current dividend yield of 0.6% isn't anything to write home about, even if the company is a Dividend Aristocrat. However, the Dividend Aristocrat status is not just about the dividend yield; it's also about making sure you buy a company with the proven growth potential to carry on growing earnings and raising dividends. That thought comes to mind when considering that Roper's stock return over the last decade was 327%, versus the S&P 500 index's 194%.

Roper's outperformance is the result of executing a business model involving buying a collection of high-margin businesses operating with leading positions in niche markets. Once part of Roper, they tend to be left alone operationally, so the original management stays in place. However, capital allocation decisions tend to be made centrally, with Roper using the cash flow from the business to fund new acquisitions. Then press repeat.

As such, Roper is now a company with a margin of 38% earnings before interest, taxation, depreciation, and amortization (EBITDA) and a free cash flow from revenue margin of above 30%. These figures are closer to technology companies -- in fact, Roper generates most of its revenue from application and network software companies.

It's also a business model well positioned to deal with a downturn, as management should be able to carry on making acquisitions during the downturn as smaller company valuations become more attractive. Given the current market malaise, I'd expect Roper to be aggressively looking at earnings enhancing acquisitions right now -- history suggests that's good news for investors.

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Daniel Foelber has no position in any of the stocks mentioned. Lee Samaha has no position in any of the stocks mentioned. Scott Levine has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Linde plc. The Motley Fool recommends Roper Technologies and Sherwin-Williams. The Motley Fool has a disclosure policy.

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