There’s no denying investing requires a certain degree of foresight. If you can accurately predict a small change in the financials of a stock, the demand for a commodity, or the future rate of dividend for any security, you can pour money into it with conviction.
Predicting the future, however, is nearly impossible which is most serious investors would rather work within a framework of rules based on probability. Sometimes rules and probabilities coincide to deliver a fairly predictable outcome. As is the case with index inclusions.
Indexes are based on strict rules. The securities picked and the weights given to each stock or security is based on predetermined parameters. Such is the case with the Dividend Aristocrats Index. We’ve discussed before how the index aims to include the very best dividend stocks based on their history.
The rules are simple. If a stock pays out a dividend and manages to increase it every year for twenty-five consecutive years, it’s added into the index. Currently, there are well over 50 stocks that meet the narrow criteria for the index. However, there are three stocks that are within striking distance of meeting the criteria pretty soon.
Does Inclusion Matter?
Before we delve into the details of these three soon-to-be-aristocrat stocks, we need to ask a key question – does inclusion even matter?
The short answer is yes. Academic studies have established a clear link between better price performance and inclusion in an index. There’s even evidence to suggest that a stock’s price will spike on the day its inclusion is announced and will keep trending upward till it is actually added to the index.
The reason for this is simple. There’s a lot of people investing in index funds. In some ways, passively investing in index funds is a lot more fashionable for rookie investors than ever before. One-third of the US market is now made of passive funds and trillions of dollars around the world are invested this way. When a stock is included in a popular fund, the company’s profile is boosted and a significant chunk of the passive pie is suddenly dedicated to the company.
So, it’s worth keeping an eye on stocks that are very close to getting into an index. Especially one as popular as the Dividend Aristocrats Index.
Here are the three companies that are remarkably close to inclusion this year:
International Business Machines (NYSE:IBM)
IBM isn’t a little-known underdog. It’s probably one of the biggest tech companies in the world. However, it’s not a fast-growth highly innovative Silicon Valley firm. The Armonk, New York-based company is more focused on tech consulting, big data, and machine learning.
It is also generating unimaginably large sums of cash. This year, the company will most likely announce another spike in its dividend, marking the 22nd year it has done so. At this rate, the company will join the Dividend Aristocrats Index in 2020.
The past few years have been tough for the company. Management has been cutting costs and trying to improve efficiency, which has impacted revenues and kept profits static. In 2017, however, the company will return to EPS growth, which makes it more likely management will decide to keep growing dividends till 2020.
Nu Skin Enterprises(NYSE:NUS)
Another likely candidate for inclusion is multilevel marketing company Nu Skin Enterprises. The company has paid a growing dividend for over 16 years at this stage and looks likely to continue.
What sets the business apart is its focus on Asia. The firm was set up to market to Japan, but now China is one of its biggest growth drivers. Sales in China jumped over 20% this past quarter and the company generates tremendous cash regardless of economic headwinds in other parts of the world. Enterprise value trades at just 12 times its free cash flow, trailing-PE is at a comfortable 21 and forecast-PE is at 16.
Realty Income (NYSE:O)
The only REIT on this list is a company dedicated to growing income from dividends. It’s one of the most well-regarded dividend stocks on the market. The company has always focused on high-yielding free-standing retail occupancies. That’s allowed it to create immense profits over the years and grow dividends for 23 consecutive years. The dividend is paid out every month.
We covered this REIT while discussing how you can create a monthly income stream from dividend stocks.
The stocks currently yield 4.2%, which is decent for most income-seeking investors. Total return over the past ten years has been a whopping 248%. In two short years the company will almost certainly be another Aristocrat.
These three stocks are more than likely to be included in the Dividend Aristocrats Index. This is important to note, because there’s a high chance these companies will keep growing their dividends at the rate they’ve managed for the past two decades.
When the announcement eventually comes around, the stock is sure to benefit. However, you can capture more of that benefit by buying into a well-priced dividend stock with a historic pedigree and high predictability right away.