Complete Guide to Dividend Aristocrats

Introduction

In 2022, the purchasing power of USD eroded to 92.6% from the level in 2021. Going back one hundred years earlier, $1 dollar was worth over 20x more than it is today. This gradual erosion of money means, put simply, that holding cash is a losing game.

In turn, investing becomes an imperative to counter the central banking’s framework. The most popular way to counter money erosion is to buy company shares. In return for inflows, the company gets to expand, buy smaller companies to cement market position, or pay off debt.

On the shareholder side of the equation, they are incentivized with dividends, as quarterly or annual payouts out of a company’s earnings-per-share (EPS). But how can investors tell this is not another money sinkhole that aids money erosion further?

After all, the company’s earnings could decline alongside its stock price. This is why it is vital to become familiarized with the concept of dividend aristocrats as an important dividend investing strategy.

What are Dividend Aristocrats?

Simply put, dividend aristocrats are companies with a solid track record, holding at least 25 years of consistently increasing its dividend payout, each year.

More precisely, a dividend aristocrat company belongs within the S&P 500 (SPX) market index, consisting of the 500 largest publicly traded companies. Such a company not only provides a reliable dividend payout to shareholders, but this dividend payout increases year-over-year, attempting to outpace the dilution of the dollar.

While stock returns mark the total percentage for gain/loss on stock investments, dividend payments can be issued as either cash or extra shares.

For instance, one such dividend aristocrat stock, Walmart (WMT), has an annual dividend yield (in cash) of 1.40%, paid out every quarter. In other words, for every $100 invested in WMT, the company pays out $1.40.

As such, aristocrat companies are an ideal starting point for conservative investors who want to curtail investing risk as much as possible. The key aspect of these companies is a continuous demand for their products, regardless of market cycles.

It is then no coincidence that we see dividend aristocrats such as Johnson & Johnson (JNJ), 3M Company (MMM), Exxon Mobil (XOM), Procter & Gamble Co (PG) or Coca-Cola Co (KO).

Their common traits account for a lean operating model, expansion, and meeting consistent market demand.

Criteria for Dividend Aristocrats

Just as aristocrats have established bloodlines, dividend aristocrat companies have to establish their payout chops on a long time scale. For risk-avoiding investors, this translates to a minimum threshold of 25 consecutive years of consistent dividend increases.

As noted, they must be within the S&P 500 exclusive list. Needing a minimum market cap (unadjusted) threshold of $12.7 billion, these companies have sufficiently deep pockets to absorb market shocks and continue to pay out dividends.

This establishes their market position as a prerequisite for reliable, though less explosive, growth. Companies that have managed to generate rising dividend payouts for over 50 years are at the top of income reliability, referred to as dividend kings instead.

To accomplish such consistency, for both 25 or 50 years, is extremely rare, accounting for less than 100 companies at any given time period. In May 2005, Standard & Poor launched the S&P 500 Dividend Aristocrats index to measure their performance under the Bloomberg ticker SPDAUDP. As of September 2023, only 67 companies made it to the list.

The stock market undergoes regular bullish and bearish cycles. For this reason, dividend aristocrat stocks are commonly referred to as ‘recession-proof’, owing to their supply of essential market needs irrelevant of market turmoils.

Sector breakdown of dividend aristocrat companies. Image courtesy of S&P Global

In addition to the basic eligibility factor, 25-year consecutive dividend growth, and being included in the Standard & Poor 500 Index, they must satisfy:

• Average daily value traded (ADVT) of $5 million for at least three months.
• Minimum full market capitalization (FMC) of $3 billion. Otherwise known as enterprise value, FMC includes both equity and debt.

Lastly, the company’s shares must be common and ordinary. This excludes preferred stocks which typically have fixed dividends set at the time of issuance, in contrast with common stocks’ variable dividends.

How to Invest in Dividend Aristocrats

Consistently rising stock dividends can come from multiple sources: individual stocks, exchange-traded funds (ETFs), or mutual funds with hand-picked dividend aristocrat stocks.
Both ETFs and mutual funds track the performance of a basket of stocks.

However, ETFs typically have lower fees as they are passively managed. On the other hand, mutual funds can be actively managed, incurring higher fees that go to fund managers for rebalancing the stock basket. Moreover, mutual funds are traded once a day, at net asset value (NAV), finalized at the end of the trading day.

To start the dividend aristocrat journey, one must open a brokerage account. Each broker has its own offering. Case in point, Robinhood lists S&P 500 Dividend Aristocrats ETF (NOBL) provided by Pro Shares fund manager.

NOBL fund tracks 69 stocks that fit the criteria. The fund has a price-to-earnings (P/E) ratio of 19.77. This means that investors are willing to pay $19.77 on every $1 the company generates.

As of August 31, 2023, NOBL yielded an average annual return of 9%. Note that this is above the annual inflation rate of 8% in 2022, which reached the highest point since 1981. The advantage of funds is to have a more diversified portfolio that further curtails risk.

To that end, such funds limit the weight of each sector to 30%, in the eventuality that one sector takes a heavier blow than the other. After selecting the broker of your choice, such as Robinhood, Betterment, SoFi or Fidelity, you may wish for the exposure of individual aristocrat stocks instead of funds.

This requires more research, but consumer staples and energy providers are typically at the top. In this scenario, investors have to pay attention to the record date of stock purchase, which will be counted as the start of the dividend payment at the payment date issued by each company.

Investors should also be aware of the ex-dividend date:

• The company declares a dividend payment on June 1st.
• Record date is June 15th.

Ex-dividend date is June 14th, so shareholders who buy the stock on, or after June 14th, will not be eligible for dividend payment. Therefore, investors less interested in getting dividends often sell their shares before the ex-dividend date. That’s because they want to avoid stock price decline.

Pros and Cons of Dividend Aristocrats

The following is a brief overview of the common advantages and disadvantages found in dividend aristocrats.

Pros

• Reliable passive income. Although on the lower dividend percentage side, the companies’ long-standing business models speak for themselves.
• Companies’ proven track record alleviates investors anxiety, much like government bonds are viewed as a safe haven asset.
• In addition to dividend yield itself, these large-cap companies provide another venue for capital appreciation. For instance, Walmart (WMT) stock has gained +72% value in the last five years.

Cons

• As established market players, they have lower dividend yield compared to growth stocks or high-yield dividend stocks.
• Even if dividends are consistent and rising, the companies’ stock price may still go down, leading to lower gains. That’s because dividend yield is inversely related to the stock price – as one goes up, the other goes down.
• Dividend income is a taxable event, excluding 401(k) or IRA accounts.
• Dividend payout ratio could be volatile depending on the percentage of the company’s profits issued as dividends. For example, Walmart (WMT) set this percentage at 35%. If there is a large dip in profits, even for recession-proof companies, higher percentage companies could feel the pressure, forcing them to cut dividend payouts.

The Difference Between Dividend Aristocrats vs. Dividend Kings

You may have noticed that Walmart has been paying its dividends since 1974, consecutively raised each year. This makes it a dividend aristocrat, as it satisfies the 25-year minimum. But it also makes Walmart a dividend king because it satisfies the 50-year minimum.

In other words, dividend kings are a subset of dividend aristocrats, as those companies that pushed the dividend payment envelope further.

For that very reason, dividend kings are even fewer, often under 50 companies in total. Moreover, dividend kings don’t have to be a part of the S&P 500 index. After all, this broad-market index weighs the tech sector as one of its largest parts.

However, the tech sector prefers to invest profits in growth instead of dividend payouts. This would make it more likely for dividend kings to fall out of S&P 500, as they focus more on financial stability.

Case in point, IBM (IBM), Exxon Mobil (XOM) and McDonald’s (MCD) are dividend aristocrats, notable for their growth. On the other hand, dividend kings are often more entrenched with lower branding focus: Abbott Laboratories (ABT), Boeing (BA), American Electric Power (AEP) and AT&T (T).

StockRover’s Dividend Aristocrat Watchlist

Similar to traditional hunters in the wilderness, successful stock yields hunters need proper tools to be successful. Stock Rover is one such tool.

Stock Rover tracks the performance of over 7,000 individual stocks available in the US. Investors can then apply 500 different metrics to filter them out according to investor needs and risk appetites.

In practice, regardless of your brokerage account, you can analyze your portfolio to make sure you made the right calls, or in preparation of making them. You could enter your ETFs, funds or stocks manually or import them via spreadsheets. Some can even be automatically synced via Stock Rover’s Brokerage Connect facility.

In the case of StockRover’s Dividend Aristocrat Watchlist, Stock Rover delivers up-to-date stock/dividend performance details for all the tickers in the watchlist. You can compare values between tickers in the Table; Chart fundamentals and technicals; as well as take a deep dive into a ticker in the Insight Panel. The watchlist is available for import from the Investor’s Library.

Most importantly, Stock Rover allows investors to craft a future portfolio dividend basket. Fund managers use similar tools to arrive at their decisions as they compare the performance of other funds.

Conclusion

As long as there are people and resources, money-making opportunities abound. Even in market downturns, the economic engine churns to meet demand. Dividend aristocrat companies are the key infrastructure of this chain, the civilization’s backdrop.

Historically, be they on a 25-year or 50-year scale, they have outperformed the broader market in terms of total returns. As such, these companies have mastered the craft of having a sustainable business model, while simultaneously and consistently rewarding their shareholders.

Investors can partake in that reliable income stream with Stock Rover. The stock performance platform is a must-have tool for any investor, just as a compass is indispensable for a seasoned sailor navigating the vast ocean of financial markets.