This Stock Could Be the Next Dividend Aristocrat

By Timothy Green, Rich Duprey, and Beth McKenna Markets Fool.com

Two and a half decades of annual dividend increases earns a company the title of dividend aristocrat. Most companies never come close, but a rare few manage to join this exclusive club. Here's why International Business Machines (NYSE: IBM), Nu Skin Enterprises (NYSE: NUS), and Realty Income(NYSE: O)all have the potential to be the next dividend aristocrat.

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Closing in on 25 years

Tim Green (International Business Machines): With 21 consecutive annual dividend increases under its belt, IBM is nearing dividend aristocrat status. Another dividend hike is likely in the coming months, which will bring the streak up to 22 years. If all goes well, IBM will join the dividend aristocrat club in 2020.

The odds of continued dividend increases for IBM look a lot better today than they did a couple of years ago. Revenue and profit have been falling in recent years as IBM works to transform itself, shedding and de-emphasizing legacy businesses and investing heavily in growth areas like cloud computing, analytics, and security. A lot of progress has been made, but until the company's fourth-quarter report last month, it wasn't clear if IBM would ever turn the corner.

Image source: IBM.

IBM expects to return to EPS growth in 2017, an important milestone. Revenue growth shouldn't be too far behind, especially with the software business growing again. The current dividend payment represents a payout ratio of about 41% relative to adjusted earnings in 2016. That's not high enough to be too concerned, but further earnings declines would have eventually caused a problem. With EPS growing again, the dividend should keep climbing higher. IBM will be a dividend aristocrat in no time.

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Not just another pretty face

Rich Duprey (Nu Skin Enterprises): Many investors would likely be surprised to learn that a multilevel marketing company paid a dividend, let alone has done so for 16 years and consistently increased it every year thereafter. And with Nu Skin Enterprises poised to report its earnings in less than a week, we're likely to see this beauty care products direct seller hike its payout once more.

Image source: Nu Skin Enterprises.

There's a good reason Nu Skin has been able to reward its investors by returning cash to them through dividends. Although its business performance waxes and wanes over time, and its business model comes in for a fair amount of criticism -- viewed by some as something akin to a pyramid scheme -- it remains a profitable business that is able to generate strong cash flows to support the payout.

Created as an MLM to serve Japan and surrounding countries, Asia is still the primary market for Nu Skin, though China now is central to its growth trajectory. And because multilevel marketing is illegal in China, it has a different business model there. Even so, revenues in China jumped 20% in constant currency terms in the third quarter, which helped it raise its full-year guidance at the time, though a month later, in the wake of a strong U.S. dollar following the election of Donald Trump as U.S. president, it updated that outlook. It believed quarterly earnings would come in at the high end of its forecast of $0.77 to $0.81 per share, but revenues would actually be at the low end of the range of $550 million to $570 million.

Still, at 21 times trailing earnings and 16 times forecasts, it would appear to be fairly valued, but its ability to generate healthy cash profits puts it in the discount bin as its enterprise value trades at just 12 times its free cash flow.

Nu Skin Enterprises isn't your typical MLM company, as most of its customers aren't looking to start their own business, and it's also unique in that it's one of a few such businesses to pay a dividend. If it keeps on its current trajectory, it should also earn itself a reputation of being a dividend aristocrat, too.

The REIT stock that pays a monthly dividend

Beth McKenna(Realty Income):Realty Income is areal estate investment trust (REIT) that focuses on free-standing retail occupancies and pays amonthly dividend. The company, which went public in 1994, has increased the size of its total annual dividend payout for 23 consecutive years.Since its stock is a member of the S&P 500 index, that means the company will join the vaulted ranks of the Dividend Aristocrats in two years, assuming it continues to hike its total annualdividend payout.

Image source: Realty Income.

The stock's current annualized dividend yield is 4.2%, making it a great choice for income-oriented investors. Butinvestors have not had to sacrifice total capital appreciation for Realty Income's wonderful dividend track record and juicy yield. Thestock has returned 248% over the 10-year period through Feb. 9, crushing the S&P 500's return of 97.6% over this period.

Realty Income'slong-term success can be attributed to its use of long-term, triple net leases (tenants pay variable costs, such as maintenance and insurance); tenant diversity; geographic diversity (it has properties in 49 states plus Puerto Rico); andfocus on stable tenants. The company targets tenants whose operationsinsulate them from online competition, such as movie theaters and other service-based business, or that are quite immune to economic downturns because they sell non-discretionary items (such as pharmacies).

All of the above factors add up to a rock-solid portfolio with enviable occupancy rates and limited turnover, and thatgenerates apredictable income stream.

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Beth McKenna has no position in any stocks mentioned. Rich Duprey has no position in any stocks mentioned. Timothy Green owns shares of IBM. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.