The 7 'Sweet Spot' Dividend Champions Poised for the Highest Total Returns (Part 2)

<< Return to Part 1 In this part 2 of our articles on the top 14 Dividend Champions that represent the “sweet spot” for total return, we will emphasize capital appreciation over yield. In part 1 of this two-part article, we started out by covering the first seven companies with the highest yields of the group of 14. Consequently, in part 1, we focused more on dividend yield than we did capital appreciation. In this part 2, we will turn our attention more towards the capital appreciation component, but dividends will still be a major focus. This is because we feel that the most important factor that should be gleaned from these articles is the importance of total return, which includes both capital appreciation and dividends. Dividends are great, and we have written about their many advantages in our three previous articles that analyzed key segments of the 98 companies on the Dividend Champions list. Links to all three articles can be found here: Article 1, Article 2, and Article 3. However, with the odds extremely high that we will have inflation in our future, dividends, even growing dividends, may not be enough. The primary reason we refer to this list of 14 Dividend Champions as companies in the sweet spot for total return, is because we believe they offer the best balance of both, growing dividends and above-average capital appreciation potential. For convenience, we repeat the following information on both the Dividend Champions and Standard & Poor's Dividend Aristocrats lists with links. The list of Dividend Champions includes 98 companies that have raised their dividends every year for at least 25 years. This list can be found here courtesy of David Fish. A second excellent source is the Dividend Aristocrats index, available from Standard & Poor's Corp. This index is comprised of 42 large-cap, blue-chip companies within the S&P 500 that have likewise increased their dividend every year for 25 years. (Standard & Poor's Dividend Aristocrats). The following graphs summary and review lists these 14 "sweet spot" candidates in order of highest estimated total return to lowest of the group. Each company covered in all four articles were reviewed since calendar year 1997, which provides an apples to apples time frame comparison. In order to be qualified as a "sweet spot" candidate, each company had to possess the following characteristics and criteria: The current dividend yield had to be above average exceeding 2% (S&P 500 average equals 1.8%). The historical total return since 1997 had to exceed the S&P 500’s. Total cumulative dividend income since 1997 should exceed the S&P 500's. Historical earnings-per-share growth had to exceed the S&P 500. Debt to equity had to be under 50%, the lower the better. Each company had to be an industry-leading large-cap blue-chip. Of course, each company had to increase their dividend for at least 25 years consecutively. Most importantly, each company had to be attractively valued based on the consensus of leading analysts reporting to FirstCall or Zacks forecasts for five-year future earnings growth. (Click to enlarge) The following "fundamentals at a glance" will review the second seven "sweet spot" candidates highlighted in green above, through the lens of our graphs research tool. Per reader requests, we have included a graphs on the S&P 500 for perspective and as a benchmark comparison. As you review each company's earnings and price correlated graphs, we suggest that you make special note of the consistency of each company's operating record as compared to the average company (S&P 500). Interpreting the Graphs Note that there is a legend at the bottom of the historical earnings and price correlated graphs, and a legend to the right of the graphs showing estimated earnings and return calculator. Also, essential information such as price, date, current PE ratios, historical earnings growth rates, the normal PE ratio if calculated, a reference to valuation formulas, market capitalization and finally debt to equity ratios are listed to the right of each historical graphs and color-coded where appropriate. Similar information will be provided to the right of the forecasting graphs (estimated earnings and return calculator) regarding price, date and current PE ratios, and a reference to the appropriate valuation formula based on forecasts. Additionally, the consensus estimated earnings growth rate and the earnings aggregator (FirstCall or Zacks) to include the number of analysts making up the consensus will be listed. (Click to enlarge) (Click to enlarge) Aflac Inc. (AFL) About Aflac Inc. “When a policyholder gets sick or hurt, Aflac pays cash benefits fast. For 55 years, Aflac insurance policies have helped provide a safety net and given policyholders the opportunity to focus on recovery, not financial stress. In the United States, Aflac is the number one provider of guaranteed-renewable insurance. In Japan, Aflac is the number one insurance company in terms of individual insurance policies in force. Aflac insurance products provide protection to more than 50 million people worldwide.” The earnings and price correlated graph on AFLAC Inc. depicts a company with a history of significantly above-average earnings growth. Of special note is how consistently the monthly closing stock price (black line) has tracked the earnings justified valuation line (orange line). AFLAC Inc. has generated very consistent earnings growth considering that it's a financial. Consequently, we feel that the current valuation unfairly punishes this well-run enterprise. (Click to enlarge) The performance results associated with AFLAC's historical price and earnings correlated graph shows that AFLAC's above-average earnings growth has amply rewarded shareholders in excess of the general market as measured by the S&P 500. Not only has capital appreciation been more than four times the averages, total cash dividends paid also exceeded the S&P 500. (Click to enlarge) AFLAC's estimated earnings and return calculator graph reports that the consensus of 18 analysts reporting to FirstCall expect a five-year estimated earnings growth of 12.5%. Therefore, AFLAC trades at a valuation that is below the value corridor represented by the five orange lines. If consensus is correct and the market capitalizes their earnings at a more appropriate 15 multiple, future capital appreciation should be above average. (Click to enlarge) Exxon Mobil Corporation (XOM) About Exxon Mobil “ExxonMobil is the world’s largest publicly traded international oil and gas company. We hold an industry-leading inventory of global oil and gas resources. We are the world’s largest refiner and marketer of petroleum products. And our chemical company ranks among the world’s largest. But we are also a technology company, applying science and innovation to find better, safer and cleaner ways to deliver the energy the world needs.”... Read more