My Top 3 Dividend Aristocrats for 2012

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We all love a good dividend producer. I'll go out on a limb and say that most of us really love a good dividend producer. My favorites are the ones that have increased said dividends for at least 25 consecutive years.

That's the main criteria in order to land on the prestigious annual dividend aristocrats list, something that rightfully gets investors' blood flowing.

As one would expect, this list features quite a few iconic companies that have been around and churning out dividends for (seemingly) forever. But it's also possible to find relatively unknown dividend aristocrats with solid growth potential that have managed to fly under the radar.

Today, I shall present you with two big-time American icons that I believe have excellent growth prospects into 2012 and beyond. I'll also dig deeper and give you a lesser-known company that I believe is a steal at its current price.

First up is a company that makes everything from power tools to pantyhose.

The innovator
St. Paul, Minn.-based 3M (NYS: MMM) has long been an innovator. The company produces more than 50,000 products. Even in 2009, one of the "worst economic times in memory," according to CEO George Buckley, the company still released more than 1,000 new products.

That's all fine and well. But can it make you money?

I believe the answer is yes. 3M is firmly entrenched as a dividend aristocrat, having increased its dividend for a mind-blowing 53 straight years. Not even former dividend aristocrat General Electric (NYS: GE) can make that claim. 3M's dividend now sits at a solid 2.7%.

In addition, 3M is well-diversified geographically and poised for growth abroad. Although non-U.S. sales accounted for 65% of the company's total revenue in its 2011 third quarter, 3M still has ample room for growth internationally, where the company generates higher revenue growth and operating margins.

Look for 3M to continue using its sizable cash flow on new acquisitions that have proven to provide solid returns for the company.  

3M is also cheap. Since the end of 2009, the S&P 500 (INDEX: ^GSPC) is up over 10%. 3M has declined over 2% during that same period.

Why?

Likely due to macro concerns. But I'm not so worried. All 3M has done during that time is increase its year-over-year revenues for eight straight quarters.

I believe this is a great opportunity to get in cheap with a quality dividend producer that can be a cornerstone of your portfolio for years. Feel free to sit back, relax, and collect your dividends.

Super-size my profits
McDonald's
(NYS: MCD) isn't exactly a groundbreaking pick here, but I believe it could be a very profitable one. The company is yielding 2.9%, and has increased that dividend for 35 consecutive years.

McDonald's has also been consistently growing its same-store sales, the key retail metric. The company saw its same-store sales increase 7.4% globally in November. Heck, this is even a (the only?) company that's doing well in Europe. November same-store sales in Europe rose 6.5%, well above analyst expectations of 4.24%.

Much of McDonald's success lately has been due to its McCafe coffee line. The company notes that most of its second-quarter growth was driven by this high-margin segment. The good news for McDonald's: This is a segment that's highly scalable to other countries, considering it already has many stores in place to sell the McCafe line. This should help ensure future growth for the company, especially in China, where the company is locked in intense competition with Yum! Brands' (NYS: YUM) KFC and Taco Bell.

One of the main reasons I like McDonald's so much is that it has a predictable and reliable stream of revenue. That's because the company gets its revenue mainly from three sources.

  1. A cut of the revenue from its restaurant sales.
  2. Rent that franchisees pay to lease McDonald's real estate (the company owns many of the locations).
  3. Regular franchisee fees.

This is also a company that's shown to be well insulated from global economic downturns due to its cheap food (everyone's gotta eat, even in a recession). Its stock is not particularly cheap right now, but I don't care. This is a solid dividend producer that has tremendous international growth prospects. McDonald's stock is up over 125% over the past five years versus -12% for the S&P 500. I'd rather get in now than miss this boat altogether.

The oddball
Last but not least is my more under-the-radar pick. Sysco (NYS: SYY) , like high yielder AT&T (NYS: T) , was just added to the dividend aristocrat list after S&P announced that it would not take into account special dividends in its determination of 25 consecutive years of dividend increases.

Sysco is North America's leading food-service distributor, commanding 17% of the market. The company is the highest dividend yielder of the three here, at 3.7%, and has been able to grow that dividend for 42 straight years.

Why invest in a boring low-margin business that can be vulnerable to consumer spending? Easy. It's because Sysco is by far the best at what it does. The company has been able to dig a wide moat around itself by focusing on controlling costs, which has allowed Sysco to generate returns roughly three times the level of its competitors.

I believe that concerns over consumer spending have beaten this stock down. Trading near historic lows at a 15 price-to-earnings ratio, this has created an excellent opportunity to purchase an industry leader for cheap that has solid and sustainable competitive advantages. Its economies of scale and excellent supply chain management give it the ability to keep its costs low and its margins higher than its peers, an advantage that the company should be able to maintain for years and years to come.

Even during the recession, Sysco's earnings were remarkably stable. When consumer spending picks back up, I believe that this industry leader is poised for growth. Until then, you can collect your dividends and get paid to wait.

I'm bullish on the three stocks mentioned here, but our chief investment officer selected a different stock as the No. 1 stock for the next year. Find out which stock in our brand-new free report: "The Motley Fool's Top Stock for 2012." I invite you to take a copy, free for a limited time. Just click here to access the report and find out the name of this legendary company.

At the time this article was published Brendan Byrnes does not own shares of any company mentioned here. The Motley Fool owns shares of Yum! Brands. Motley Fool newsletter services have recommended buying shares of 3M, Sysco, McDonald's, and Yum! Brands. Motley Fool newsletter services have recommended creating a diagonal call position in 3M. 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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