ADP - Get Ready To Back Up The Truck On 10 Coiled-Spring Dividend Aristocrats

2023-04-27 07:15:00 ET

Summary

• The mildest recession in history is expected within a few months combined with a 2011-style debt ceiling crisis.
• The bull market could likely begin after the market finally bottoms from the 2022 bear market, and it could be sensational - a possible 47% one-year rally.
• Hyper-growth dividend aristocrats like these 10 have the potential to soar 74% in the first year of the new bull market.
• These 10 aristocrats have a 1.9% very safe yield, 45-year dividend growth streaks, A- credit ratings, and are growing at 15.7%.
• Over the next three years, they could double the S&P's returns and long term possibly deliver 17% to 18% returns, just as they have for the last 29 years. Add two high-yield hedging ETFs and you could enjoy Nasdaq-beating 14% long-term returns and 63% smaller peak declines in even the most extreme market crashes.

This article was published on Dividend Kings on Monday, April 24.

Part 1 of this series taught us why dividend growth is so important.

• All 133 Dividend Aristocrats Ranked By Growth

In fact, strong and consistent dividend growth is the most powerful secret on Wall Street, helping millions of income investors avoid disastrous retirement-killing losses and instead enjoy retirement dream returns.

Long-Term Consensus Return Potential

(Sources: DK Research Terminal, FactSet, Morningstar)

We learned that the dividend champions offer superior yield and slightly better long-term return potential than their more famous aristocrat cousins.

And we saw how all 133 aristocrats, champions, kings, and global aristocrats compared by consensus growth.

But now it's time to show you how to quickly and easily build the ultimate dividend aristocrat growth portfolio. One that's potentially likely to outperform the S&P in the coming face-ripping bull market which may begin by the end of the year.

• September or October, historically speaking
• Possibly in July or August if the debt ceiling crisis results in a 2011-style correction

How To Find The Best Fast-Growing Aristocrats You Can Safely Buy Today

Let me show you how to screen the Dividend Kings Zen Research Terminal, which runs off the DK 500 Master List, to find dividend aristocrats for this recession.

The Dividend Kings 500 Master List includes some of the world's best companies, including:

• Every dividend champion (25+ year dividend growth streaks, including foreign aristocrats)
• Every dividend aristocrat
• Every dividend king (50+ year dividend growth streaks)
• Every Ultra SWAN (as close to perfect quality companies as exist)
• The 20% highest quality REITs, according to iREIT
• 40 of the world's best growth blue chips

OK, so now let's take a look at what 10 fast-growing aristocrats in five sectors are the growth champions, according to analysts.

The 10 Fastest Growing Aristocrats That Are Reasonably Priced Today

Here they are in order of fastest growth.

I've linked to articles about each company for further research.

1. Lowe's ( LOW )
2. MSA Safety ( MSA )
3. Albemarle ( ALB )
4. Cincinnati Financial ( CINF )
5. Carlisle Companies ( CSL )
6. Polaris ( PII )
7. Caterpillar ( CAT )
8. Automatic Data Processing ( ADP )
9. Parker-Hannifin ( PH )
10. Chubb ( CB )

Fundamental Summary

• 1.9% very safe yield (1.15% severe recession cut risk)
• 22.5% undervalued (potentially strong buy)
• 15.7% growth
• 17.6% long-term total return consensus
• 45-year dividend growth streak
• 3.7% 30-year bankruptcy risk (A- credit rating)

Lowe's 2025 Consensus Total Return Potential

MSA Safety 2025 Consensus Total Return Potential

Albemarle 2025 Consensus Total Return Potential

Cincinnati Financial 2025 Consensus Total Return Potential

Carlisle Companies 2025 Consensus Total Return Potential

Polaris 2025 Consensus Total Return Potential

Caterpillar 2025 Consensus Total Return Potential

Automatic Data Processing 2025 Consensus Total Return Potential

Parker-Hannifin 2025 Consensus Total Return Potential

Chubb 2025 Consensus Total Return Potential

S&P 2025 Consensus Total Return Potential

Average 2025 Consensus Total Return Potential: 58% vs. 25% S&P

Average 2025 Annual Consensus Total Return Potential: 19% vs. 9% S&P

So we have exceptional quality and safety and growth that's almost 2X that of the S&P.

That means potentially life-changing long-term return potential.

Long-Term Consensus Total Return Potential

(Source: DK Research Terminal, FactSet, Morningstar)

Exceptional quality and safety and return potential far beyond almost any ETF.

Historical Total Returns Since 1994

Market-smashing returns for nearly 30 years.

The average 12-month rolling return of 18% matches the long-term consensus from analysts.

Best Bull Market Rallies From Bear Market Lows Since 1994

(Source: Portfolio Visualizer Premium)

The average rolling 12-month return is 60% better than the S&P, implying that these 12 aristocrats could potentially soar as much as 74% in the first year of the new bull market.

Note that for this to actually happen, they would have to decline significantly since they're currently 20% undervalued, with about 27% single year return potential justified by current fundamentals.

To rally 74% from here would require a significant bubble, in which case you would want to start trimming or selling them if they become 50% historically overvalued.

Income Growth That Rich Retirement Dreams Are Made Of

Take a look at what fast aristocrat growth can do over 29 years.

• 14.2% annual income growth vs. 8.1% S&P
• 2022 yield on cost 126% vs. 23% S&P

Analysts expect future income growth to be similar to the last 29 years.

(Source: DK Research Terminal, FactSet)

The Downside Of This Portfolio And How To Address Them

Some investors can't tolerate a 1.9% yield, no matter how safe it is or how fast it grows.

In addition, the volatility is higher than many investors can stand.

While this hyper-growth aristocrat portfolio isn't particularly more volatile than the S&P during most bear markets, most investors underperform the market over time because they can't stomach even market-level bear market declines.

Most investors would have made 2X better returns over the last 20 years by investing in a balanced stock/bond portfolio like a 60/40. This article wa lks you through the reason that long bonds plus managed futures are the single best long-term hedging strategy of the last 53 years.

• 97% statistically likely to continue working in the future

The nice thing about this hedging strategy is that it helps boost yield in addition to slashing volatility.

• KMLM + EDV/ZROZ/UTHY = 6.6% yield and long-term consensus return potential/historical returns

So what does this mean?

• 16.6% KMLM
• 16.6% long-bonds (UTHY is my personal favorite)
• 66.6% these 10 hyper-growth aristocrats (6.66% each)

Hyper-Growth Aristocrat Plus Portfolio Vs. 60/40

(Source: DK Research Terminal, FactSet)

Hyper-Growth Aristocrat Plus Portfolio Vs. 60/40

(Source: DK Research Terminal, FactSet)

Historical Returns Since December 2007 (Start Of The Great Recession)

Far lower volatility and 56% better negative-volatility-adjusted total returns (Sortino ratio) than the S&P and 17% better than the aristocrats on their own.

Don't think a 67% stock/33% hedging portfolio can beat the market? Well, it did, by about 2% per year, just like analysts expect in the future.

Riding Over The Market's Most Extreme Potholes In A Rolls Royce

(Source: Portfolio Visualizer Premium)

How about higher yield than a 60/40, with lower volatility and market-beating returns that are expected to outperform the Nasdaq over time?

That's the power of a diversified balanced hyper-growth aristocrat portfolio.

Bottom Line On 10 Dividend Aristocrats

Let me be clear: I'm not calling the bottom in these hyper-growth aristocrats. (I'm not a market timer).

Even Ultra SWAN aristocrats can fall hard and fast in a bear market.

Fundamentals are all that determine safety and quality, and my recommendations.

• Over 30-plus years, 97% of stock returns are a function of pure fundamentals, not luck
• In the short term, luck is 25X as powerful as fundamentals
• In the long term, fundamentals are 33X as powerful as luck

While I can't predict the market in the short term, here's what I can tell you about 10 fastest-growing aristocrats.

1. Lowe's
2. MSA Safety
3. Albemarle
4. Cincinnati Financial
5. Carlisle Companies
6. Polaris
7. Caterpillar
8. Automatic Data Processing
9. Parker-Hannifin
10. Chubb

Fundamental Summary

• 1.9% very safe yield (1.15% severe recession cut risk)
• 22.5% undervalued (potentially strong buy)
• 15.7% growth
• 17.6% long-term total return consensus
• 45-year dividend growth streak
• 3.7% 30-year bankruptcy risk (A- credit rating)

Analysts expect these aristocrats to soar 58% by 2025, twice the S&P consensus.

However, historically speaking, these faster-growing companies have the potential for a 74% rally off the bear market low, compared to 47% for the S&P (historical 12-month bull market rally).

More importantly, whether you're interested or need to hedge your portfolio to sleep well at night in a recession, these aristocrats create a core portfolio that can potentially deliver superior yield, growth, and total returns than either a 60/40, the S&P, or even the Nasdaq.

All with 67% smaller peak declines in bear markets.

• -7% in October 2022 vs. -21% 60/40, -28% S&P, and -35% Nasdaq

This is high-yield Ultra SWAN investing at its finest. World-beater blue-chip assets, utilizing the best-performing asset class in history plus the best hedging strategy of the last 53 years.

Are you worried about the debt ceiling?

S&P and Goldman Sachs say we're likely headed for another 2011-style crisis.

The bond market says the risk of default is the highest in history, higher than the debt ceiling crises of 2013, 2011, and 1995.

Well, guess what? These fast-growing aristocrats will be just fine, even if we do end up going over the cliff.

Moody's estimates a two-month default would trigger a 5% GDP contraction and 7.5 million job losses.

• Basically equal to another Great Recession.

These 10 aristocrats didn't cut their dividends in 2008, and they're 98.85% likely to keep raising their dividends just as they have for 45 years.

And if you own them in a hedged portfolio, you will benefit from around 63% lower declines in the crash that would surely follow a temporary default.

Ultra SWAN high-yield investing is all about never having to worry about the debt ceiling, inflation, Fed, geopolitics, or the economy.

For further details see:

Get Ready To Back Up The Truck On 10 Coiled-Spring Dividend Aristocrats