What Are Dividend Aristocrats?
A dividend aristocrat is a company within the S&P 500 index that not only pays a consistent dividend to shareholders but also increases the size of its payout annually. To earn the prestigious title of Dividend Aristocrat, a company needs to have increased its dividends for at least the past 25 consecutive years. Typically, these firms also possess a market capitalization exceeding $3 billion.
Key Points to Remember
- 25-Year Track Record: The company must have a consistent 25-year history of increasing the dividends it pays to shareholders.
- Member of the S&P 500: Only companies in the S&P 500 are eligible for aristocrat status, although investors may apply additional criteria.
- Stable and Profitable: These companies are often stable, well-established firms with predictable profits, which allows them to weather various economic climates.
- Recession-Resistant: Dividend Aristocrats typically have products or services that remain in demand, even during economic downturns.
- Similar to Dividend Kings: Though they differ slightly, these two groups represent highly reliable dividend payers, with Dividend Kings having a longer history of dividend increases.
Understanding the Stability of Dividend Aristocrats
Dividend Aristocrats are unique in their ability to maintain high dividend yields, which make them particularly appealing to income-focused investors. At any given time, fewer than 100 companies meet these strict criteria. As of 2021, there were just 65 Dividend Aristocrats listed.
These firms span various sectors, including healthcare, retail, oil and gas, and construction. Typically, younger, high-growth companies, particularly those in the tech sector, reinvest their profits for growth rather than pay out dividends. This stands in contrast to the dividend aristocrats, which opt to reward shareholders through consistent and increased payouts.
Highlighting Exemplary Dividend Aristocrats
Various analysts evaluate Dividend Aristocrats based on stock growth, market resilience, and future growth prospects. Here are a few notable names:
- AT&T (T): A telecommunications giant with a long history of reliable dividends.
- Exxon Mobil (XOM): Known for its stability even in volatile oil markets.
- Walgreens Boots Alliance (WBA): A retail behemoth in the health sector.
- AbbVie (ABBV): A major player in the pharmaceutical industry.
- IBM (IBM): A consistent dividend payer in the technology sector.
- 3M (MMM): A household name in manufacturing and consumer goods.
- Caterpillar (CAT): A leading construction and mining equipment manufacturer.
Several indexes, such as the S&P Dividend Aristocrats Index, track the performance of these elite companies.
Pros and Cons of Investing in Dividend Aristocrats
Investing in Dividend Aristocrats can offer multiple benefits and some potential drawbacks:
Pros
- Stable Income: Regular, growing dividend payments provide reliable income for shareholders.
- Financial Strength: Consistently increasing dividends are a strong signal of financial health.
Cons
- Limited Growth: High dividend payouts could indicate fewer opportunities for the company to reinvest in growth.
- Tax Implications: Dividends are taxable, which can impact net returns.
Dividend Aristocrats vs. Dividend Kings
Dividend Kings and Dividend Aristocrats both have stellar reputations for increasing dividends. However, a company qualifies as a Dividend King if it has increased dividends for at least 50 consecutive years—regardless of S&P 500 membership.
An example is The Tootsie Roll Co. (TR), which has increased its cash dividend for 54 consecutive years, making it a Dividend King.
Exploring Other Quality Dividend Payers
Companies generally adopt one of three dividend policies:
- Stable Dividend: Regular, predictable dividends yearly, irrespective of earnings fluctuations.
- Constant Dividend: A fixed percentage of profits is paid to shareholders, reflecting the company’s earnings volatility.
- Residual Dividend: Dividends paid from the remaining profits after covering capital expenditures and working capital.
FAQ: Building Your Dividend Aristocrat Portfolio
How Can You Build a Dividend Aristocrat Portfolio?
You can construct a focused dividend portfolio by identifying the stocks from the S&P 500 that meet the Dividend Aristocrat criteria. Lists of these companies can often be found through financial websites.
How Much of a Portfolio Should Be Dedicated to Dividend Aristocrats?
The allocation depends on factors like risk tolerance, investment horizon, income needs, and tax situation. Generally, retired individuals may benefit more from these stocks due to their stability and income potential.
Do Dividend Aristocrats Outperform the Market?
While past performance shows a similar total annual return to the broader market, the Dividend Aristocrats tend to exhibit lower volatility overall, making them a less risky option.
Are Dividend Aristocrats Good Investments During a Recession?
Yes, these companies are mature enough to endure economic downturns and might even become safe havens during market turmoil.
Related Terms: Dividend Kings, Dividend Yield, Market Capitalization, Recession-Proof Stocks.
