3 Highest Expected Total Return Dividend Aristocrats Going Into 2023

The Dividend Aristocrats are S&P 500 stocks that have raised their dividends for at least 25 consecutive years. These companies usually enjoy significant competitive advantages while they are also resilient to recessions. 

The ongoing bear market, which has been caused primarily by the surge of inflation to a 40-year high, has led some Dividend Aristocrats to become highly attractive from a long-term perspective. 

In this article, we will discuss the prospects of 3 top Dividend Aristocrats, based on their expected 5-year return, namely V.F. Corporation (VFC), 3M Company (MMM), and Albemarle (ALB).

Diving into V.F. Corporation’s Dividend Yield

V.F. Corporation was founded in 1899 and has become one of the largest apparel, footwear, and accessories companies in the world. Its brands include The North Face, Vans, Timberland, and Dickies.

V.F. Corporation enjoys a significant competitive advantage thanks to its well-known premium brands, which offer strong pricing power to the company. V.F. Corporation has also proved resilient to recessions. As a result, it has become a Dividend King, with 50 consecutive years of dividend growth. There are only 41 companies that have achieved such long dividend growth streaks.

On the other hand, V.F. Corporation is currently facing a perfect storm due to the triple impact of 40-year high inflation on the stock. First of all, high inflation has led consumers to tighten their wallets. Consequently, the company has resorted to great discounts to reduce its inventory levels. In addition, high inflation has greatly increased the costs of V.F. Corporation, and hence it has caused its operating margins to shrink.

Moreover, inflation exerts pressure on the valuation of V.F. Corporation, as it reduces the present value of the future cash flows of the company. In fact, this is the primary reason behind the ongoing bear market of the S&P 500. Due to the triple impact of inflation on V.F. Corporation, the stock has plunged 56% this year to a nearly 10-year low.

However, it is important to realize that inflation will certainly moderate in the upcoming years, as the Fed has prioritized restoring inflation to its long-term target of 2%. Thanks to its aggressive interest rate hikes, the Fed will likely achieve its goal sooner or later. When that happens, V.F. Corporation is likely to offer excessive returns to investors.

The stock is currently trading at a nearly 10-year low price-to-earnings ratio of 13.4, which is much lower than its 10-year average price-to-earnings ratio of 21.5. In addition, the stock is currently offering a nearly 10-year high dividend yield of 6.3%.

Its payout ratio has spiked to 85%, but it is likely to moderate in the upcoming years due to an expected recovery in the business of V.F. Corporation. Given also its rock-solid balance sheet, V.F. Corporation is likely to recover strongly from the ongoing downturn in the upcoming years. Hence, it is likely to highly reward those who purchase it around its depressed stock price. 

3M Company as a Dividend Aristocrat

3M sells more than 60,000 products, which are used every day in homes, hospitals, office buildings, and schools around the world. The company has approximately 95,000 employees and serves customers in more than 200 countries.

3M enjoys a wide business moat thanks to its exceptional R&D department. Management has consistently proved its commitment to spending 5%-6% of total sales (about $2 billion per year) on R&D to create new products and satisfy ever-evolving consumer needs. This strategy has greatly benefited 3M, as 30% of its sales during the last fiscal year came from products that did not exist five years ago. The unique R&D department of 3M has resulted in a portfolio of more than 100,000 patents.

3M has also proved resistant to recessions. Thanks to its wide business moat and its resilience to recessions, 3M has achieved one of the longest dividend growth streaks in the investing universe, with 64 consecutive years of dividend growth. Moreover, the stock currently offers a nearly 10-year high dividend yield of 4.8%. Given its healthy payout ratio of 58% and reliable business performance, the Dividend King is likely to continue raising its dividend for many more years.

Like most companies, 3M is currently facing a headwind due to high-cost inflation. However, thanks to its dominant business position, the company has been able to offset this headwind with material price hikes. As a result, 3M is on track to post nearly all-time high earnings per share this year.

The only caveat is the risk caused by the numerous pending lawsuits facing 3M. There are nearly 300,000 claims that its earplugs, which were used by U.S. combat troops and were manufactured by a subsidiary, were defective. The subsidiary of 3M filed for bankruptcy, but a U.S. judge ruled that this bankruptcy would not prevent lawsuits from burdening 3M. As a result, no one can predict the final amount that 3M will have to pay for compensation.

On the other hand, it is critical to realize that 3M has a rock-solid balance sheet and enjoys a wide business moat. As a result, the company is likely to recover after it settles its pending litigation issues. As the stock is trading at a nearly 10-year low price-to-earnings ratio of 12.3 and is offering a nearly 10-year high dividend yield of 4.7%, the popular dividend stock is likely to highly reward those who purchase it around its 9-year lows.

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Albemarle’s Dividend Outlook Explained

Albemarle is the largest producer of lithium and the second-largest producer of bromine in the world. The two products account for about 75% of the company’s sales. Albemarle produces lithium from its salt brine deposits in the U.S. and Chile and two joint ventures in Australia. The assets in Chile are characterized by the exceptionally low production costs of lithium.

As a commodity producer, Albemarle has exhibited a highly volatile performance record, with a decline in its earnings per share in 4 of the last 9 years. During the last decade, Albemarle has grown its earnings per share by only 1.7% per year on average. Moreover, the company has proved vulnerable to recessions, as commodity prices tend to plunge during rough economic periods. Due to all these characteristics, Albemarle is not suitable for risk-averse, income-oriented investors.

On the other hand, Albemarle enjoys exceptionally strong business momentum right now, primarily thanks to its dominant position as the largest producer of lithium in the world. Lithium is a major component of electric vehicles, which experience exponential growth, with ample room to grow for decades. Thanks to this secular tailwind, Albemarle is on track to more than quintuple its earnings per share this year, from $4.05 in 2021 to an all-time high of $20.75 this year.

Final Thoughts

Bear markets are inevitably painful for most investors, but the latter should realize that bear markets offer rare opportunities to initiate positions in solid companies at exceptionally attractive prices. V.F. Corporation and 3M are facing strong headwinds, but they will likely recover and offer excessive returns to their shareholders in the upcoming years. Albemarle is also attractive, but for a different reason, as it has exciting growth prospects thanks to the secular growth of electric vehicles.

Do you think adding dividend stocks to your portfolio is a solid strategy in the current macroeconomic climate? Let us know in the comments.