3 Dividend Aristocrats We Wouldn't Buy

Can Coca-Cola win the dividend challenge?

Investors are seeking income from any source possible, and Dividend Aristocrats have a reputation for being among the best income-producing stocks in the market. Yet even after achieving the 25-year history of rising dividends necessary to become a Dividend Aristocrat, it's still possible to fall short.

To determine which Dividend Aristocrats may not be the best picks out there today, we asked three Motley Fool contributors to choose stocks they believed weren't worth your consideration -- and to suggest alternatives that would be better picks. Take a look at their choices and see if you agree with their reasoning.

Bob Ciura: The Coca-Cola Company is a Dividend Aristocrat I wouldn't buy today, despite its fantastic track record as a top-notch dividend stock. Sure, it's raised its dividend for an impressive 53 years in a row, but I think investors will receive a better buying opportunity at some point in the near future. Coca-Cola's stock is priced very aggressively, and its bloated valuation is a red flag -- especially considering the major headwinds impacting Coca-Cola's growth.

For starters, the company has experienced currency challenges. As a multi-national giant, Coca-Cola is being hit hard by the strengthening U.S. dollar. In fact, unfavorable currency effects shaved four full percentage points off of fourth-quarter revenue. And even when we exclude currency headwinds, Coca-Cola still isn't growing much. Revenue excluding currency was flat in 2014, year over year.

Given these obstacles, it's possible the market will rescind Coca-Cola's premium valuation. The stock trades for 25 times trailing EPS and 19 times forward EPS. These multiples are well above the market average and are also at multi-year highs for Coca-Cola itself. Without supporting growth, I believe there is room for significant multiple contraction.

As an alternative, I would recommend investors pickPepsiCo instead, because PepsiCo's growth justifies its valuation. PepsiCo's organic revenue grew 4% last year, and currency-neutral EPS rose 9%. The reason why PepsiCo is growing while Coca-Cola isn't is PepsiCo's large snacks business. Led by its Frito-Lay brand, PepsiCo generated 10% organic revenue growth in its Latin America Foods business and its dividend yield stands at 2.7%. PepsiCo is growing, and the stock trades for a more reasonable 22 times trailing EPS.

Source: Wal-Mart.

Asit Sharma: With its dominant market position and sheer size, Wal-Mart Stores seems to be a perennially safe bet for income investors. And with 40 years of consecutive dividend increases, it's one of the most "aristocratic" of Dividend Aristocrats.

Yet Wal-Mart has struggled to increase sales as the global economy has rebounded. The company's recent minimum wage increase for U.S. hourly workers is a first step toward fixing problems with customer service, cleanliness, and shelf-stocking issues which have plagued U.S. stores. But luring back customers of various income levels will prove to be a long-term battle.

Further, while Wal-Mart has successfully launched smaller store formats, such as the "Neighborhood Markets" concept, I'm skeptical of management's assertion in its latest analyst call that "supercenters remain the driver of our sales and growth in retail square footage." As consumers shun malls and big box stores in favor of local options, online convenience, and in Wal-Mart's case, dollar stores, this growth plan may ultimately become a recipe for stagnating sales.

For a better alternative, try dividend aristocrat Kimberly-Clark . The $19.7 billion company is about 25 times smaller than Wal-Mart, and its niche of personal care and tissue products will only continue to expand as the world population increases. KMB's dividend streak stands at 42 years, and its current yield of 3.2% nicely outpaces Wal-Mart's yield of 2.4%. Kimberly-Clark may be a bit staid, but it's not stagnant: over the last 5 years, company shares have returned 115% on a total return basis -- versus Wal-Mart's total return of 68.3%.

Source: Lowe's.

Dan Caplinger: Often, when you look at an industry, you'll find a particular stock that qualifies as a Dividend Aristocrat yet still doesn't offer as much as one of its peers. That's the case with Lowe's , which has put together an impressive history of dividend increases but simply hasn't been able to stand up to rival Home Depot and its more lucrative payout yield.

Lowe's is one of the few stocks that qualify for what I call Double Dividend Aristocrat status, with more than half a century of dividend increases. Yet even with all of its payout boosts, Lowe's only carries a dividend yield of 1.2%. By contrast, Home Depot has a 2% yield, and while it can't boast a long streak of consecutive increases, it has managed to grow its dividend almost 1000-fold since it made its first dividend payment in 1987.

More importantly, Lowe's hasn't managed to emerge from the shadow of its more successful rival, with Home Depot having had consistently better growth over the long haul. It's true that Lowe's has played catch-up lately with its stock price, and the favorable home-improvement industry has left room for both players to participate in the gains. Yet for those looking for better chances for more dramatic capital gains and dividend growth, Lowe's simply seems like a second-best pick compared to Home Depot.

The article 3 Dividend Aristocrats We Wouldn't Buy originally appeared on Fool.com.

Asit Sharma has no position in any stocks mentioned. Bob Ciura owns shares of PepsiCo. Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola, Home Depot, Kimberly-Clark, and PepsiCo. The Motley Fool owns shares of PepsiCo and has the following options: long January 2016 $37 calls on Coca-Cola and short January 2016 $37 puts on Coca-Cola. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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