Bar none, they're the most elite dividend stocks on Earth.
But to earn their coveted status, they've had to increase their dividend every year for the past 25 years. And to keep the status, they have to keep paying a larger dividend every year from now on -- no easy feat.
That's why only 54 out of the 500 stocks in the S&P 500 have made the cut.
Appropriately, Standard & Poor's calls this select group of stocks "Dividend Aristocrats." And they're about the finest dividend stocks money can buy.
You already know many of these stocks. They are big-name, cash-rich companies like 3M, Clorox, Exxon Mobil, Wal-Mart, Target, McDonald's, Coca-Cola and others.
Some investors write these stocks off, thinking that big companies are old news and are done growing. And for many large companies, that may be true.
But not for this group.
Since the index was first introduced in 1989 by Standard & Poor's, the Dividend Aristocrats have handily outpaced the S&P 500 Index, as you can see in this chart:
It's not hard to see why. Investors love owning stocks that pay them a larger and larger stream of dividend income every year.
Take Procter & Gamble (NYSE: PG), a Dividend Aristocrat that's increased its dividend for the past 58 years in a row, for example. Let's say you bought shares for $8 in 1993 (split-adjusted). That year, you would have received $0.30 per share in dividends. If you held on to those shares to today, the company would have rewarded you with a dividend raise every year since. Today, those $8 shares would pay you $2.57 a share in dividends per year -- a 776% increase from when you bought the stock. That $2.57 per share also equates to a whopping 32% dividend yield on your original $8 per share investment.
All told, you would have seen an incredible return of 837%, including dividends, since you first purchased the stock.
Now you can see why these elite dividend payers are so respected. You could buy any one of them and have a strong chance for big returns over time.
But I've found an even better strategy that could magnify the returns of these already great investments.
Let me explain.
Some of you may have heard of the "Dogs of the Dow" strategy. Investment manager Michael O'Higgins originally brought the strategy to the forefront in his 1991 book, "Beating the Dow."
The concept was simple. O'Higgins purchased the 10 laggards in the Dow Jones Industrial Average at the beginning of each year. Because dividend yields move in the opposite direction of stock price, he simply invested equal amounts of money in the 10 Dow stocks with the highest yields.
Since he knew all of the stocks that were included in the Dow were inherently good companies, they were likely to bounce back quickly once investors realized they were undervalued.
His strategy worked. Backtesting showed that since the 1920s, this "Dogs of the Dow" strategy outperformed the market every year. And from 1992 to 2011 , the stocks averaged a return of 10.8% per year -- beating the S&P 500's 9.6% annual return over the same time period.
With that as inspiration, I've created my own custom "Dogs of the Dividend Aristocrats" strategy to find the absolute best Dividend Aristocrat stocks to purchase this year.
I've kept it simple -- picking the 10 highest-yielding Dividend Aristocrats out of the list of 54 companies that are part of the index.
As an extra measure, I've also displayed value metrics -- including one of my favorites. It's the same value metric I used to find the best bargain dividend payers in the S&P 500 -- the ratio of enterprise value to cash flow from operations (EV/CFO).
As I explained in my previous article, EV/CFO is like the P/E value ratio, but it works better when comparing companies across several industries because it strips out factors like depreciating assets and tax implications that vary from business to business.
An EV/CFO of 10 or less signifies an excellent value. That means it would take the company 10 years or less to buy itself (buy outstanding stock and pay off all debts) given the current annual cash flow it makes from operations.
Here are my 10 "Dogs of the Dividend Aristocrats" (ranked by highest dividend yield to lowest):
The Top 10 Highest-Yielders In The Dividend Aristocrat Index
A.K.A. "The Dogs Of The Dividend Aristrocrats"
As I said before, I'm confident that most Dividend Aristocrats are excellent companies to own given their solid dividend history and performance.
For those looking to narrow their choices, you could simply pick the five highest yielders from this list, or you could pick five that appear to be the best values.
My value favorites on this list are Chevron (NYSE: CVX), AT&T (NYSE: T) (which my colleague David Sterman wrote about this week), Cincinnati Financial (Nasdaq: CINF) and Consolidated Edison (NYSE: ED). Each of these are trading with an EV/CFO ratio of under 10 and relatively low price-to-earnings (P/E) ratios compared with the S&P 500 index (which has a P/E around 17 right now).
Risks to Consider: No investment is guaranteed, and note that individual stocks have been booted out of the Dividend Aristocrat Index in the past (especially in 2008) due to dividend cuts or failure to meet the index's requirements.
Action to Take --> If the success of the "Dogs of the Dow" strategy is any indication, these 10 Dividend Aristocrats could offer a double win -- giving dividend investors a chance to pick up quality high-yielders at a big discount.
For those who would rather invest more broadly in Dividend Aristocrats, the ProShares S&P 500 Aristocrats ETF (NYSE: NOBL) -- which tracks all 54 companies included in the S&P 500 Dividend Aristocrats Index -- may be a great alternative.