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A Dividend Aristocrat is a company that has increased its dividend annually for 25 years or more.
The term is most commonly applied to American stocks such as Coca Cola and Procter & Gamble. But some British stocks also fit the definition.
Here I talk about two. I like both businesses, but for now I would only consider adding one of them to my portfolio.
Diageo
Although Diageo (LSE: DGE) may not be a household name, but many of its products are. Of Guinness to Johnnie WalkerDiageo is the company behind many of the bottles found on drinks counters around the world.
It has turned out to be a great business. The demand is great and quite resistant. Because it owns premium and unique brands, Diageo has pricing power. That helps explain how it was able to make an after-tax profit of £3.7bn last year.
Shares yield 2.6%. There are certainly higher yields available elsewhere right now. FTSE 100 but I like Diageo's track record. The Dividend Aristocrat has increased its payout to its shareholders annually for more than three decades.
As with any stock, that doesn't necessarily indicate what may happen in the future. The company has been struggling with weaker demand in Latin American markets. If the global economy worsens, expensive drinks could also be less in demand elsewhere.
But I believe Diageo has a strong, proven business model and long-term cash generation potential.
Spirax-Sarco
The other FTSE 100 Dividend Aristocrat I'm talking about is even less well known than Diageo.
Spirax Group (LSE: SPX) (the new name announced last week for Spirax-Sarco) is an engineering company that sells to industrial customers rather than consumers.
Their business model is well designed in my opinion. By selling to businesses, you tap into a market with constant demand and potentially large budgets.
Spirax offers a range of customized solutions. That helps build customer loyalty, because once you've demonstrated your expertise in designing a solution for a specific customer need, I believe you'll be a priority when that customer needs similar work done next time.
The business faces challenges. A slowing economy could lead customers to delay non-essential work in some cases, which could hurt company revenue and profits.
Recently, for example, the company has noted “weak demand”for semiconductor wafer manufacturing equipment and biotechnology products.
Operating profits in this year's midterm fell 7% year-on-year despite double-digit revenue growth. But the company increased its interim dividend by 8%. This followed last year's 12% annual increase, continuing a streak of annual dividend growth dating back to late 1960s.
I would buy one
At the right price, I would be happy to add these two Dividend Aristocrats to my portfolio if I had extra money to invest.
But Spirax's valuation is too high for me right now. Its price-earnings ratio of 36 is noticeably steeper than Diageo's.
