Each week, one of ourinvesting experts answers a reader's
question in our the Q&A column at our sister site,
InvestingAnswers.com. It's all part of our mission to help
consumers build and protect their wealth through education. This
week's questionwill be answered byInvestment Analyst David
Since the financial crisis of 2008, many investors have lost
interest in growthstocks and prefer to focus on stocks capable of
generating solid dividends. Today's question looks at an investment
strategy that focuses on the very best dividend-paying stocks.
I've been hearing alot of good things about "dividend aristocrats
." What are they, and should I be investing in them?
--Frankie, Tucumcari, New Mexico
Frankie, the name alone should tell you that these are a special
group of companies. Standard & Poor's (S&P) did an
exhaustive amount of research, seeking companies that manage to
raise their dividends year in and year out -- even when the
U.Seconomy slows. They found that these companies are likely to
keep boosting their dividends at a steady pace, well into the
future, rain or shine.
To be a "dividend aristocrat," a company must be in the S&P
500, have amarket value of at least $3 billion and must have
boosted its dividend -- by a little or a lot -- for 25 years
straight. In just the past year,
Cardinal Health (NYSE:
have been welcomed into the club. On the flip side, the financial
crisis of 2008 caused many longstanding members of the club -- most
notably the big banks -- to drop off as dividends were slashed to
Of the 500 companies in theindex , 42 (or 8%) make the grade.
The averagedividend yield of these aristocrats is 2.8%, compared to
the 1.8%yield offered by the other 458 companies in the S&P
S&P found that these companiesoffer up a unique twist. Not
only do they generate steadily rising income streams, but they also
tend to see their share prices rise in value at a respectable clip.
In fact, S&P's researchers studied data from the past 90 years
and found that dividend payments accounted for about one-third of
the wealth that these stocks have generated, with the other
two-thirds of the investment return captured by rising share
A basket of these stocks has delivered a total return (dividends
plusstock price gains) of 6.3% annually during the past five years,
which is three times the gains posted by the broader S&P 500.
In fact, the S&P 500 Dividend Aristocrats index has
outperformed the S&P 500 index during three-, five-, 10- and
20-year periods on a total returnbasis .
Offense And Defense
Part of the charm of owning stocks that sport rising dividend
yields is their broad-based appeal inbull orbear markets. In abull
market , these stocks tend to rise in tandem with the broader
averages. And when themarket slumps, investors are inclined to sell
other stocks and hang on to their dividend-paying stocks
asbuy-and-hold investments . That means they're less subject to the
wild price swings that other stocks have generated in recent
And whereas other dividend-focused strategies tend to tie
investments to a particular industry such as utilities,real estate
(REITs) or energy masterlimited partnerships (MLPs), the dividend
aristocrats are represented by many industries. This removes the
risk of your portfolio being tied to just a narrow slice of the
So should you invest in aristocrat stocks? The answer is a
qualified yes. These companies are surely tried-and-true winners,
but they've also become especially popular in recent years as the
relative yields of fixed income investments likebonds andCDs have
slumped toward zero.
Eventually, those types of investments will begin to offer
better yields, which will draw some attention away from
dividend-paying stocks. In effect, these aristocrats offer great
long-term opportunity but, as with many stocks, might slump in
value in the short term. So the answer to your question really
depends on how long you plan to own them.
Action to Take -->
The stocks that qualify as dividend aristocrats typically don't
offer the most robust dividend yields. Indeed, many stocks such as
Duke Energy (NYSE:
offer yields in the 4% to 6% range -- roughly twice the yield of
the typical aristocrat. Yet unlike the higher yielders that possess
more limited growth prospects and may boost their dividends only
modestly, the dividend aristocrats appear to be in a very good
position to steadily boost their dividends at a faster pace. Own
them now and you may be stunned to see what kinds of dividends they
are generating a decade or two in the future.
This article originally appeared on InvestingAnswers.com:
Ask The Expert: How
Can 'Dividend Aristocrat' Stocks Help You Beat The Market?
-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC owns
shares of T in one or more of its "real money" portfolios.