This guest post was written by Ben Reynolds, of Sure Dividend
The Dividend Aristocrat Index has outperformed the overall stock market by 2.88 percentage points per year over the last decade. A Dividend Aristocrat stock has paid increasing dividends for 25 or more consecutive years. To accomplish this feat, a business must have stable, growing cash flows. Dividend Aristocrats as a whole have made excellent buy and hold investments over the last several years. Not all Dividend Aristocrats are created equally, however.
Enter the PEG Ratio
The PEG ratio was popularized by Peter Lynch, who averaged 29% returns over 13 years in his time with the Magellan Fund. The PEG ratio compares how cheap or expensive a business is to its growth rate. It is simply the P/E ratio divided by growth rate. The lower the PEG ratio, the cheaper a business is taking into account its growth.
Using last year’s earnings per share growth rate can be a bit misleading. One-year growth rates can have wild swings that are not indicative of long-term growth. Using the lesser of the 10 year revenue per share growth rate or 10 year dividend per share growth rate for each business produces results that are closely aligned with real business growth.
Dividend Aristocrats & the PEG Ratio
What happens when you combine the PEG ratio with Dividend Aristocrat stocks? You find businesses with a long history of rewarding shareholders through increasing dividends trading at low prices compared to growth-adjusted value. The top 5 Dividend Aristocrats with the lowest PEG ratios are:
- Aflac (AFL): 1.14 PEG
- Chubb (CB): 1.66 PEG
- Family Dollar (FDO): 1.69
- Wal-Mart (WMT): 1.90
- T Rowe Price Group (TROW): 1.99
Want the complete list? This Spreadsheet sorts all Dividend Aristocrats by PEG ratio, with the cheapest businesses first. The PEG ratio is an excellent way to generate long-term investment ideas, but there are other metrics to consider besides growth and value. Sure Dividend uses the 5 Buy Rules from the 8 Rules of Dividend Investing to find high quality businesses with a long history of rewarding shareholders that are suitable for long-term holdings.
Aflac is the world’s leading cancer insurer. The company sells cancer, health, and life insurance policies in Japan and the US. About 75% of the company’s revenue comes from Japan. Aflac has managed to write highly profitable health insurance policies over the last 5 years, maintain a pretax profit margin of around 20%. The company has increased its dividends for 31 consecutive years, and is likely to continue to do so in the future.
Chubb Group sells home, car, business and supplemental health insurance through its network of independent brokers and agents. The company operates in North and South America, Australia, Europe and Asia. About 75% of the company’s revenue comes from the US, versus just 25% internationally. The company has increased its dividends for 32 consecutive years. Chubb has had a combined ratio (expenses & losses dividend by premiums) under 100% since 2003; the company has a long history of prudent, profitable underwriting. Chubb is a Top 10 stock based on the 8 Rules of Dividend Investing.
Family Dollar Overview
Family Dollar is one of the US’ leading discount retailers. The company has 8,100 locations in 46 states with over $10 billion in annual revenues. Family Dollar is one of only four Dividend Aristocrats to have grown revenue per share at over 10% for the last decade.
Wal-Mart (WMT) is the world’s largest retailer. The company is focused on low prices resulting from operating efficiencies driven by economies of scale. Wal-Mart serves 245 million customers each week from over 11,000 locations in 27 countries. The company has paid increasing dividends for over 4 decades. Walmart is a Top 10 stock based on the 8 Rules of Dividend Investing.
T Rowe Price Group Overview
T Rowe Price is a global investment management business with over $700 billion in assets under management. The company provides mutual funds and investment management, among other services, for individuals, institutions, and retirement plans. The company has increased its dividends for 27 consecutive years.
Investing in high quality businesses at fair or better prices is an excellent way to compound your investments over time. The PEG ratio combined with stocks with a long history of rewarding shareholders through dividends is a quick way to generate ideas for high quality dividend stock investing.