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5 ‘dividend aristocrat’ stocks set to boost earnings up to 77%

These companies help investors weather a shaky stock market

Analysts expect Sherwin-Williams Co. to grow its earnings per share by 42% over the next two years.

Companies that consistently increase dividend payouts tend to outperform the broader market in the long run.

To get a handle on which are the most attractive, we have identified a select list of companies with stellar track records for dividend increases that are also expected to produce double-digit growth of earnings per share over the next two years. Such stocks may help alleviate investors’ worries, as the stock market rebounds from a 10% decline suffered in the past month.

The S&P 500 Dividend Aristocrats Index is made up of the 54 S&P 500SPX, +1.19% stocks that have raised dividend payouts for 25 consecutive years. Those aren’t necessarily the best income plays, as the stocks’ yields range from 0.56% to 5.43%. But the index has returned 122% over the past five years, compared with 102% for the broader S&P 500. For 10 years, those figures are 183% and 121%, respectively.

According to S&P Dow Jones Indices, “dividends have contributed nearly a third of total equity returns while capital gains have contributed two-thirds” since 1928. As you can see from the 5-year and 10-year returns above, that “third of total equity return” can really add up over time.

One excellent way to play the Dividend Aristocrats Index for a long-term investment is the ProShares S&P 500 Dividend Aristocrats ETF NOBL, +0.83%which seeks to mirror the performance of the index by holding all of the component stocks.

For investors looking to hold the individual stocks, here are the Dividend Aristocrats expected by analysts to produce the most growth in earnings per share over the next two years:

Dividend Aristocrats with the fastest earnings growth
CompanyTickerIndustryEPS Estimate - 2014EPS Est. - 2015EPS Est. - 2016Estimated EPS % growth
Nucor Corp.NUE,+2.34%Steel$2.22$3.46$3.9277%
AbbVie Inc.ABBV,+0.73%Major Pharmaceuticals$3.17$4.02$4.8453%
Automatic Data Processing Inc.ADP,+1.03%Data Processing Services$2.93$3.30$4.1642%
Sherwin-Williams Co.SHW,-0.74%Industrial Specialties$8.69$10.70$12.3142%
Target Corp.TGT,-1.48%Discount Stores$3.19$3.79$4.5041%
Source: FactSet
Here are the dividend yields, total returns and forward price-to-earnings information for the group:
Dividend yield, total return and price-to-earnings
CompanyTickerDividend YieldTotal return - YTDTotal return - 3 yearsPrice/ 2015 EPS Est.Price/ 2016 EPS Est.
Nucor Corp.NUE2.80%1%55%15.313.5
AbbVie Inc.ABBV3.25%18%N/A19.012.5
Automatic Data Processing Inc.ADP2.52%9%79%26.018.3
Sherwin-Williams Co.SHW0.96%26%191%26.318.6
Target Corp.TGT3.38%0%21%19.313.7
Total returns assume dividends are reinvested. Source: FactSet

The forward price-to-earnings ratios based on 2014 estimates are looking rather pricey for all of the stocks, except for Nucor. In comparison, the S&P 500 trades for about 15.1 times forward earnings. But for longer-term investors, the forward P/E ratios based on 2015 estimates are quite reasonable.

Over recent years, valuations for many fast-growing stocks, including Amazon.com Inc. AMZN, +1.94% and Twitter Inc. TWTR, -9.84% have been driven by expectations of continued market-share and revenue gains, while the companies haven’t generated consistent profits. But earnings per share is a very meaningful figure for the Dividend Aristocrats, which keep making money and rewarding their shareholders, year after year.

If you are interested in dividend stocks as income plays, please see our series from earlier this month, which included the highest-yielding S&P 500 stocks, along with a discussion of risks from rising interest rates. The series continued with high-yielding limited partnerships and real estate investment trusts.

Philip van Doorn