Abstract Stocks

Investing in the Dividend Aristocrats

The Dividend Aristocrats are a select group of companies that have been increasing their dividends for over 25 years. These stocks offer investors superior risk-adjusted returns.

Dividend Aristocrats: 25 Years of Consistently Growing Dividends

Over the last century, dividends have contributed approximately one third of the total return generated from U.S. stocks. While dividends have been on the decline over the past few decades, they still play an important role to many stock investors who are looking for both income and capital appreciation. One popular dividend investing approach is centered around the Dividend Aristocrats, which is a select group of large capitalization stocks that have increased their dividend each year for the last 25 years. The Dividend Aristocrats are appealing to investors who are seeking companies that pay dividends and have shown the ability to grow them over time.

The Dividend Aristocrat Selection Process

According to S&P Global, the Dividend Aristocrats have produced a better long-term return than the S&P 500 and done so with less risk. The Dividend Aristocrat list is refreshed each year, with new companies meeting the criteria being added while those failing it being removed.

What Does a Dividend Aristocrat Look Like?

As a result of the criteria on the prior card, Dividend Aristocrats tend to be large, more mature companies that consider paying dividends to shareholders as a top priority. Because Dividend Aristocrats need to have paid and increased their dividends each year for the last two and a half decades, many have been through multiple economic downturns and expansions. And if companies have been able to maintain their dividend and even increase it during recessions or other difficult economic events, it highlights the stability of the firm’s business, its ability to sustain growth, its financial strength and its management’s commitment to paying a dividend.

One measure that investors can look at to determine if dividends may grow over time is the payout ratio, which measures the amount of earnings being paid out to produce a dividend. If the payout ratio is low, this indicates the company is reinvesting in the business and has the ability to increase the dividend payment in the future if management decides that is the best interest of shareholders.

Dividend Payout Ratio = Total Dividends / Net Income x 100

Investors can also use per share data like dividend and earnings per share in order to calculate the payout ratio. For example, if a company generated $10 in annual earnings per share and paid out $2.50 in dividends throughout the year, the dividend payout ratio would be 25%.

The Power of Dividend Growth

Dividend investors often find the top yielding stocks in the market and leverage those as a starting point for their dividend investing approach. However, it’s important to keep in mind that a very high dividend may be a result of a very low stock price due to financial problems with a company. In many instances, the elevated dividend is not sustainable, and investors don’t get the dividend income they expect because the dividend ultimately gets cut or eliminated.

Looking for companies that are continuously paying a dividend and growing them over time is the hallmark of the Dividend Aristocrats. Let’s use an example to see the power of a growing dividend.

Assume an investor makes the following investment into a dividend paying stock that is growing its dividend and is a member of the Dividend Aristocrats.

  • Initial Investment: $50,000
  • Price Per Share: $100
  • Number of Shares: 500
  • Starting Yield: 1%
  • Dividend Growth Rate: 7%

In year one, the total amount paid in dividend is $500 ($50,000 x 1%), but as the dividend grows over time (at 7% per year) the amount paid out to the investor also grows. If the investor held the stock for 25 years, the dividends paid in the last year would be roughly $19,300. The amount being paid annually in dividends ($19,300) is equivalent to over 38% of your entire initial investment of $50,000. This is just the dividend payment and doesn’t include capital gains.

Of course, most investors don’t hold stocks for 25 years and it’s very difficult to pinpoint a Dividend Aristocrat before it gets added to the list, but the example above drives home the power of investing in companies that have the ability to increase their dividends over long periods of time.

Finding Dividend Aristocrats in Today’s Market

Dividend investing is a popular form of investing, especially for those stock investors in retirement or investors who have a preference toward income producing investments. But investing solely based on dividend, or yield, fails to capture many of the important questions a dividend investor may want to ask. For instance, is the dividend sustainable, is the company likely to pay the dividend over time and what are the odds the dividend will continue to grow or expand in the future? By looking to the Dividend Aristocrats, investors can be fairly confident that the dividends they are receiving are mostly safe and going to be growing over time. But as the case is with any investment approach, nothing is a 100% certain, and investors seeking consistent dividend payers need to keep this reality in mind when investing for the long-term.

In 2021, there were a total of 65 S&P 500 Dividend Aristocrats. Investors who are looking to see the top 30 Dividend Aristocrats can use the link below to find stocks that have produced 25 years of increasing dividends. The list of stocks spans across a wide range of sectors and industries, such as consumer staples and real estate. Investors who are seeking both value via above average dividends, as well has signs of growth and fundamental health, given dividends have increased over a long period of time, can look to the Dividend Aristocrats as a starting point for new investment ideas.

See the Dividend Aristocrats in Today’s Market

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