As 2019 draws to a close and the calendar turns toward the new year, it is an opportune time for investors to position their stock portfolios for 2020; with the S&P 500 near a record high and interest rates on the decline, high-yield dividend growth stocks are especially attractive for income investors, asserts Ben Reynolds, a contributors to MoneyShow and the editor of Sure Dividend.

Specifically, income investors should consider the Dividend Aristocrats, a group of 57 stocks in the S&P 500 Index that have each increased their dividends for at least the past 25 consecutive years. Not only have the Dividend Aristocrats provide steady income growth from year to year through their consistent dividend increases, but many also have high dividend yields.

The following 4 Dividend Aristocrats have dividend yields of 3% to 6%, generate strong cash flow, and have the ability to raise their dividends for many years. They represent our top Dividend Aristocrats to buy in 2020 and hold for long-term dividend growth and superior total returns.

AT&T Inc. (T)

AT&T is the largest telecommunications company in the U.S., with a market capitalization of $285 billion. AT&T offers traditional telecom services including wireless, Internet, and cable television. It also offers DirecTV satellite television. AT&T conducts most of its business in the U.S., although it does have a meaningful presence in Latin America.

AT&T is a highly attractive dividend stock, not only because it is a Dividend Aristocrat, but also because it has a very high yield of 5.3%. And, AT&T’s large dividend payout is highly secure. Through the first three quarters of 2019, the company generated $21.9 billion of free cash flow. It used $11.1 billion of cash flow for dividend payments in that time, meaning it maintained a dividend payout ratio of 51% in terms of free cash flow.

The dividend is highly sustainable, with plenty of cash flow left over for growth investment and debt reduction. The company recently guided investors that it expects to generate at least $30 billion in annual free cash flow by 2022. This will help it repay its debt in the aftermath of the massive Time Warner acquisition. After the Time Warner deal the company’s debt swelled to $180 billion, with a net-debt-to-adjusted EBITDA ratio of 3.0x.

Click here to download an Excel Spreadsheet with all 57 Dividend Aristocrats now. Inside you will find metrics that matter like price-to-earnings ratios, market capitalizations, and dividend yields for each stock. 

But AT&T has made progress by reducing its net-debt-to-adjusted-EBITDA ratio to 2.8x by the end of last year, and expects to further reduce its debt ratio to 2.0x-2.5x by 2022. At the same time, the Time Warner acquisition was a transformational event for AT&T, which will lead the company into the future. With Time Warner’s valuable properties — including CNN, HBO, the Warner Bros. movie studio, and more — AT&T is poised to become a leader in content.

As a content distributor, it is highly important for AT&T to produce its own content. By doing so, it can protect itself against the trend of “cutting the cord” in which consumers are increasingly canceling their cable packages in favor of skinny bundles and Internet streaming services. Meanwhile, AT&T is simultaneously provided with a hedge against rising content costs.

AT&T has increased its dividend for 36 years in a row, including a recent 2% increase. As the company only pays out a little more than half of its free cash flow in dividends, there is plenty of room for continued dividend increases each year. AT&T is not a high-growth dividend stock, as its rate of dividend increases will likely remain in the low single-digits, but it nevertheless should continue to increase its dividend annually like clockwork. And with a starting yield over 5%, it is highly attractive for income, especially in an environment of falling interest rates.

Exxon Mobil (XOM)

The energy sector was the worst-performing sector of the S&P 500 Index in 2019, which naturally begs the question whether income investors should go bargain-hunting. After all, many large-cap oil stocks such as Exxon Mobil offer high dividend yields. Indeed, Exxon Mobil stock yields 5%, and it has also increased its dividend every year for the past 37 years in a row.

Oil prices remain well below their 2014 peak above $100 per barrel, but oil majors like Exxon are working to lower their breakeven prices. Exxon’s portfolio high-grading efforts have made the company more efficient and allowed it to generate profits, even if oil prices remain near $60 in the United States. Last quarter, net income of $3.17 billion declined by nearly 50% from the same quarter last year.

But by increasing its production, the company can grow its profits going forward, even if oil prices never reclaim the 2014 highs. Last quarter, Exxon grew its upstream liquids production by 5%. Production growth in the U.S. is focused on the Permian Basin, one of the highest-quality oil fields in the country. And, as a global super-major, Exxon can generate growth from rising international demand for oil and gas.

Many emerging parts of the world are still seeing rising energy demand, which in turn bodes well for Exxon. According to the company, 550 billion barrels of oil and another 2,100 trillion cubic feet of gas will be required to meet global demand through 2040. By then, global liquids demand is expected to increase 30%.

To help meet this demand, Exxon expects to grow its production from the current level of 4.0 million barrels per day, to 5.0 million barrels per day by 2025. In particular, Guyana is an attractive area of international production growth for Exxon. It expects Guyana production to exceed 750,000 barrels per day by 2025. The Permian Basin and Bakken fields will play a vital role in Exxon’s U.S. production growth. These two fields should account for over 1 million barrels of oil equivalents per day for Exxon in five years.

The oil industry is notoriously cyclical, which makes it difficult for oil producers to consistently raise their dividends each year. But Exxon has proved remarkably stable, even during industry downturns. It should continue to raise its dividend each year, even in a downturn or recession strikes over the next several years. By 2025, the company forecasts its earnings could rise 40% from 2017 levels, even if oil prices fall to $40 per barrel.

Exxon stock yields 5%, and the company should continue to increase its dividend each year moving forward. Sustainable 5% yields are not easy to find in a stock market currently sitting at a record high, which makes Exxon particularly attractive for dividend investors. Because of its industry-leading balance sheet quality and long history of dividend increases, Exxon is a long-term oil stock to buy for income investors.

AbbVie Inc. (ABBV)

AbbVie is a pharmaceutical company with a focus on immunology, oncology, and virology. It was spun off from Abbott Laboratories in 2013, and since then has grown into a massive pharmaceutical manufacturer, with a market capitalization of approximately $130 billion. AbbVie’s product portfolio is centered on multi-purpose drug Humira, one of the top-sellers in the world. In fact, Humira sales made up more than half of AbbVie’s total revenue over the first three quarters of 2019.

But this is a potential concern for AbbVie, due to patent risk. Humira has already lost patent exclusivity in Europe, and is facing steep biosimilar competition that has forced the company to cut prices in order to preserve market share. This has come at a significant cost to AbbVie—international sales of Humira plunged 28.5% through the first three quarters of 2019. Sales increased 8.2% in the U.S. over the same period, but this is little consolation to investors, as Humira is scheduled to lose patent expiration in the U.S. in 2023.

Fortunately, AbbVie has prepared for this, through organic investment as well as acquisitions. In each of the past two years, AbbVie spent over $5 billion on research and development. This investment has paid dividends for the company, as new products are beginning to show positive returns. For example, Imbruvica sales increased 30% over the first three quarters of 2019, exceeding $3.3 billion. Venclexta is another growth product for AbbVie, as its sales doubled in the same time.

These products have helped AbbVie continue to generate strong earnings growth, even in a difficult time when its major product is seeing intensifying competition. AbbVie increased its adjusted earnings-per-share by 9% last quarter, and by 12% over the first three quarters of 2019. Share repurchases have boosted this growth. AbbVie reduced its weighted-average diluted share count by 78 million shares, or 5%, through the first three quarters.

In addition to building its own pipeline, the company is buying growth through the massive $63 billion acquisition of Allergan (AGN), maker of the highly popular cosmetic product Botox. The Allergan acquisition is highly attractive for AbbVie, as it provides significant growth and also diversifies its portfolio. Botox generated $2.63 billion of revenue for Allergan over the first three quarters of 2019, up 5.3% from the same period in 2018.

Click here to download an Excel Spreadsheet with all 57 Dividend Aristocrats now. Inside you will find metrics that matter like price-to-earnings ratios, market capitalizations, and dividend yields for each stock. 

The combined company will have annual revenue of nearly $50 billion. AbbVie expects the transaction to be 10% accretive to adjusted earnings per share in the first year after closing, with peak accretion at more than 20%. AbbVie expects adjusted earnings per share growth of 13% for 2019, which allowed the company to raise its dividend by 10% in November. With a forward yield of 5.2%, AbbVie offers a strong mix of dividend yield and growth.

Walgreens Boots Alliance (WBA)

Lastly, Walgreens Boots Alliance is a high-yield Dividend Aristocrat with a number of positive catalysts, one of which includes a potential buyout. In November, Reuters reported that the company has held discussions to take itself private with multiple leading private equity firms, including KKR (KKR). Analyst reports content a go-private bid could reach $75 per share for Walgreens. That price represents a 28% premium to Walgreen’s current share price.

But even if Walgreens does not go private, we believe it could generate strong total returns for shareholders. First, while the company has had a rough few years due to a difficult environment for retailers, it is working aggressively to turn itself around. The entire pharmacy retail industry is dealing with the possibility that e-commerce giant Amazon would enter the industry. Complicating matters further is that Amazon’s $753 million acquisition of online pharmacy PillPack would be its Trojan horse for entering the market.

In response, established pharmacy giant Walgreens has expanded its partnerships with other services to maintain store traffic. For example, it announced plans for 600 LabCorp patient service centers at Walgreens stores, and made an investment in specialty pharmacy provider Shields Health Solutions. In the meantime, Walgreens remains highly profitable, with a compelling dividend and annual dividend increases.

Walgreens has kept its profits afloat, due in part to significant cost-cutting. Walgreens recently increased its targeted annual savings to over $1.8 billion by fiscal 2022. These savings will be procured through optimizing its store count, including closures of hundreds of under-performing stores in the U.S. and the United Kingdom. Closing stores that are losing money will help Walgreens reduce its expenses, and redirect financial resources into better-performing stores.

Walgreens stock has a 3.1% dividend yield, while the company has increased its dividend for 44 consecutive years, including a 4% increase in July. It should continue to raise its dividend each year going forward. Walgreens expects roughly flat adjusted earnings-per-share for the upcoming fiscal year, but another dividend increase next year is likely.

In the most recent fiscal year, the company generated adjusted earnings-per-share of $5.99; if earnings remain at this level, it would have a dividend payout ratio of approximately 31% for the upcoming year. This is a relatively low payout ratio, which allows for the company to continue raising its dividend.

Walgreens continues to hold positive long-term growth potential, due primarily to the aging U.S. population. The Baby Boomers are one of the largest generational groups in the country, meaning demand for healthcare services and pharmaceutical products is only likely to grow for many years. With a universally recognized brand and over 18,000 stores globally, Walgreens possesses unique scale to capitalize on the aging population trend.

Click here to download an Excel Spreadsheet with all 57 Dividend Aristocrats now. Inside you will find metrics that matter like price-to-earnings ratios, market capitalizations, and dividend yields for each stock.