Dividend Aristocrats are a special category of dividend-paying stocks with a long track record of paying – and increasing – their payouts. Because of their stable and rising payouts, a collection of these dividend dynamos can form the foundation of a lucrative, income-paying portfolio.
Here’s what Dividend Aristocrats are and why they might be just what your portfolio needs.
What are Dividend Aristocrats?
Dividend aristocrats are among the most stable dividend payers in the stock market. To qualify as a Dividend Aristocrat, a company must meet the following criteria:
- Be part of the Standard & Poor’s 500 Index
- Pay and increase the dividend for at least 25 consecutive years
- Have a market capitalization of at least $3 billion
- Have an average daily trading volume of at least $5 million
These criteria ensure that only relatively large, stable companies achieve aristocrat status. So the list of Dividend Aristocrats consists of large-cap stocks with solid, cash-generating businesses. These companies tend to grow slowly, which means they don’t have much opportunity to reinvest their free cash flow to pay it out to shareholders.
As a result, you are unlikely to find the next hyper-growth company within this group, but you will find companies with resilient business models that can sustain cash flow.
And as impressive as it sounds to be a Dividend Aristocrat, there’s a group for companies that go a step further and increase their payouts for fifty years: Dividend Kings.
High-yielding dividend aristocrats
In 2024, the Dividend Aristocrats consist of just 68 companies, many of which you may not know about despite their history of attractive payouts.
Here are the top 20 based on their dividend yield (April 2024 data):
| STOCK AND DIVIDEND returns |
|---|
| Leggett & Platt (LEG): 9.8 percent |
| Kimberly-Clark (KMB): 3.9 percent |
| 3M (MMM): 5.7 percentAmcor (AMCR): 5.4 percent |
| Kenvue (KVUE): 3.8 percentConsolidated Edison (ED): 3.8 percent |
| Franklin Resources (BEN): 4.5 percent |
| IBM (IBM): 3.5 percent |
| Federal Realty Investment Trust (FRT): 4.4 percent |
| AbbVie (ABBV): 3.5 percent |
| Chevron (CVX): 4.2 percent |
| Stanley Black & Decker (SWK): 3.4 percent |
| T. Rowe Price Group (TROW): 4.2 percent |
| The J.M. Smucker Company (SJM): 3.4 percent |
| Essex Property Trust (ESS): 4.1 percent |
| CH Robinson Worldwide (CHRW): 3.4 percent |
| NextEra Energy (NEE): 3,33,33 percent |
While some investors seek the highest current yield on their dividend stocks, others look for stocks that can grow their payouts over time. These latter stocks may have a lower yield today, but can grow their dividends over time, sometimes by 9 or 10 percent over long periods of time.
How to invest in dividend stocks
If you’re interested in becoming a dividend investor, you have two major options: pick individual stocks yourself or buy a fund of dividend stocks.
Investing in individual stocks requires a lot of work to understand the industry, the company’s competitive advantage, and its financial situation, among other things. Investing in individual stocks goes much further than just figuring out the dividend yield and buying the stock.
Most companies pay dividends every quarter. The company’s board of directors formally announces the dividend and payout date quarterly through a press release or a filing with the Securities and Exchange Commission (SEC). The money is then sent directly to your investment account.
If you invest in individual stocks, you should be aware of some important dates:
- Registration date: Investors who are registered as shareholders from this day onwards will receive the dividend payment.
- Ex-dividend date: From this day onwards, shareholders who purchase the shares will no longer receive the next dividend payment.
- Payment date: On this day, investors receive the dividend payment.
On the ex-dividend day, before the stock even trades, its price is adjusted downward by the amount of the dividend, and days or sometimes weeks later, on the payment date, the dividend appears in your account.
If you want to invest in Dividend Aristocrats through a fund, fund manager Pro Shares has an ETF specifically for this, the S&P 500 Dividend Aristocrats ETF (NOBL). Another option is the SPDR S&P Dividend ETF (SDY). Both funds pay dividends every quarter.
The big advantage of investing in a fund is that you can have a complete portfolio of dividend shares at your disposal from the start. You’ll enjoy diversification because you’ll own a portfolio of stocks with every dollar you invest. This diversification means that no one stock will hurt your portfolio too much, reducing your risk. And you don’t have to track and analyze every position like you do with individual stocks, making it much easier to track and a great boon for new investors.
What to consider when investing in dividend stocks
When investing in individual dividend stocks, you should pay particular attention to a few things:
- Taxes: Any dividends you receive are taxable unless they are in a tax-advantaged account such as an IRA or 401(k). And that’s true even if you reinvest your payouts in more shares of the stock or fund. Qualified dividends are taxed at more favorable capital gains rates, compared to ordinary income tax rates.
- Payout Ratio: The payout ratio is the percentage of the company’s profits that are paid out as dividends. The higher the ratio, the more uncertain the dividend. If a company pays out 80 percent of its profits, a small dip in its fortunes, perhaps during a recession, could force the company to cut its dividend. Keep a close eye on this figure. On the other hand, a low ratio allows a company to increase its payout even faster than its earnings growth.
- Eroding Competitive Position: Dividend-paying companies tend to grow slowly and often have few places to invest their excess cash flow. But for others, it may be that the core business is actually shrinking or the company is not reinvesting in its operations, meaning it is slowly losing its competitiveness in the industry. So while the dividend looks good today, it could be cut tomorrow if profitability falls.
These are just a few key issues with dividend stocks, and you’ll want to take a closer look at other aspects of the individual company. These concerns (excluding the tax issues) are usually a question for investors in a dividend stock fund because it is made up of many companies.
In short
If you’re looking for dividend stocks with a strong track record, it’s hard to do better than the Dividend Aristocrats. These stocks can be a great starting point for your research into attractive dividend-paying companies, but you should still analyze each company carefully. If you’re looking for the simple yet lucrative option, look at funds that invest in these strong dividends.
