What is a Dividend Aristocrat?

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Definition:

A dividend aristocrat is an S&P 500 company that has increased its dividend each year for at least the past 25 years without pause.

🤔 Understanding dividend aristocrats

Dividend aristocrats are businesses with consistently increasing dividends. Specifically, companies must be members of the S&P 500 and have increased their dividends each year for at least 25 years. Many investors see dividends as a sign of a stable company with little risk of failure. Growing dividends over time may indicate that the company sees steady growth and has sound finances. Many investors seek dividends because they want to produce income from their investments. Some investors seek out dividend aristocrats for their perceived safety and strong cash flow.

Example

One example of a dividend aristocrat is Coca-Cola, which has increased its dividend each year since the 1980s.

Another company, AT&T, joined the dividend aristocrat list in 2012 after increasing its dividend payment every year since 1987.

Takeaway

A dividend aristocrat is like a maturing apple tree…

When you plant an apple tree, you might not get fruit for the first couple of years while it grows. When it starts to produce fruit, you may get just a few apples in the first year. However, as it matures, the tree will likely continue to grow and produce more fruit, increasing its yield each year. But like stocks, not all trees mature at the same rate and unexpected events can reduce the expected yield. For example, the tree could get a disease and rot away, producing no fruit.

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What is a dividend aristocrat?

A dividend aristocrat is a company that’s raised its dividend payment every year for the past 25 years or longer. The company also must be a member of the S&P 500 to qualify. A company that holds its dividend steady or reduces its dividend at any point loses dividend aristocrat status until it rebuilds a 25year history of dividend increases.

The only time a company can retain its status as a dividend aristocrat while reducing its per-share dividend is when it goes through a stock split. For example, a company is not penalized for halving its per-share dividend if it doubles the number of shares through a stock split, because the company, effectively, has not changed its dividend payout.

Many investors view dividend stocks as more stable than non-dividend-paying companies. A long history of increasing dividends without skipping or reducing payments adds to the perception of stability, making dividend aristocrats popular among dividend investors. Historically, there has been a relationship between dividend stability and performance. The dividend aristocrats have produced a higher return and lower volatility than the average return of the S&P 500 Index from 1989–2018. Many mutual funds and exchange traded funds focus on the dividend aristocrats. That makes it easier for investors to easily diversify among stocks with consistent dividends.

What obstacles do companies have to overcome to be dividend aristocrats?

Joining the ranks of the dividend aristocrats isn’t an easy task. There are 500 businesses in the S&P 500 and fewer than 15% of them are dividend aristocrats.

The first obstacle a business needs to overcome to become a dividend aristocrat is joining the S&P 500. For a company to qualify for the S&P 500, it must meet the following requirements:

  • It must be based in the United States.
  • It must file form 10-K with the SEC.
  • The company’s U.S.-based assets and revenues must be larger than its assets in any single foreign country.
  • It must be listed on an eligible exchange, such as the New York Stock Exchange, NASDAQ, or Cboe.
  • Its market capitalization must be $8.2B or more.

A committee selects businesses to appear in the S&P 500 from the companies that meet those requirements.

Once a company joins the S&P 500, it needs to pay increasing dividends every year, for at least 25 years. To manage this feat, a company has to produce consistently growing revenues that can support increasing dividends. Dividend aristocrats often feel pressure to continue growing their dividends because falling out of the dividend aristocrats can paint the company in a bad light.

What are the characteristics of dividend aristocrats?

To qualify as a dividend aristocrat, companies must be part of the S&P 500 and increase their dividend payments for at least 25 consecutive years.

Membership in the S&P 500 means that a dividend aristocrat, by definition, must be a large-cap (large market capitalization) company in the United States. The requirement that the company increase its dividend each year implies that the company produces strong, growing cash flows, to the point that it has enough money on hand to return excess funds to shareholders.

Dividend aristocrats exist across a variety of industries, with consumer staples and industrials composing 45% of the group. Other highly represented industries include consumer discretionary spending, materials, healthcare, and financial firms.

Historically, dividend aristocrats have offered higher dividend yield than the S&P 500 as a whole. Between 1998 and 2018, the dividend aristocrats offered an average dividend yield of 2.5% compared to the S&P 500’s average 1.8%. They also tend to have less price volatility than the S&P 500 as a whole.

What is a large cap company?

A large cap company is a company with a large market capitalization. Generally, large caps include businesses worth more than $10B. There are also small caps, which include any business worth $250M to $2B. Medium cap stocks fall in between.

Why do consumer staples and industrials show up so often in the dividend aristocrats?

Consistently increasing dividends over the course of 25 years is difficult. The economy moves in cycles with many upswings and downswings. Some businesses that do very well when the economy is strong will falter when the economy gets weaker. Similarly, companies that succeed in weak economies might not be able to keep pace when the economy grows.

Businesses such as consumer staples sell products with relatively set levels of demand. People always need to buy things like paper towels, toilet paper, cereal, and other staple products. Whether the economy is good or bad, people will buy these products.

Similarly, consumer staples continue producing food products or cleaners whether the market is up or down. The demand for their products is relatively similar regardless of the economy’s performance.

Consistency over long periods is an important part of paying increasing dividends, so companies that can succeed in strong or weak economies have an advantage when it comes to joining the ranks of the dividend aristocrats.

An unusual example of a dividend aristocrat is Automatic Data Processing. It’s the only information technology company in the dividend aristocrats. The company provides services including HR, payroll, and tax support to other businesses.

Like consumer staples, the demand for these kinds of services is relatively consistent. In both weak and strong economies, businesses need to pay their employees and deal with taxes. Because the demand for Automatic Data Processing remains similar regardless of the economy, it makes it easier for the company to maintain its dividend.

Another thing that helps staples provide consistent dividend growth is that they require relatively less reinvestment in the business, which frees up more cash to return to shareholders.

A large, stable technology company has to spend a significant amount of its revenue on research and development for new products. That means that those companies can produce better returns for shareholders by paying smaller dividends and focusing more on internal investment.

In some industries, like consumer staples, there’s less potential to grow by investing back into the company. There are only so many ways to innovate on cereal or soap. For these types of businesses, returning money to shareholders through dividends is one of the best ways to produce value.

What stocks are in the dividend aristocrats?

The members of the dividend aristocrats change on a regular basis. Whenever an S&P 500 company reaches the milestone of increasing its dividends for 25 years, it joins the group. Whenever an existing dividend aristocrat fails to increase its dividend or decreases its dividend, it leaves the aristocrats.

The list of dividend aristocrats, as of May 2020, is:

  • Archer-Daniels-Midland
  • Amcor
  • Brown-Forman
  • Colgate-Palmolive
  • Clorox
  • Coca-Cola
  • Hormel Foods
  • Kimberly-Clark
  • McCormick & Company
  • PepsiCo
  • Procter & Gamble
  • Sysco Corporation
  • Wal-Mart
  • Walgreens Boots Alliance
  • A.O. Smith
  • Cintas
  • Dover
  • Emerson Electric
  • Expeditors International
  • Illinois Tool Works
  • 3M
  • Pentair
  • Roper Technologies
  • Stanley Black & Decker
  • W.W. Grainger
  • General Dynamics
  • Caterpillar
  • Raytheon Technologies
  • Otis Worldwide
  • Carrier Global
  • Abbott Laboratories
  • AbbVie
  • Becton, Dickinson & Company
  • Cardinal Health
  • Johnson & Johnson
  • Medtronic
  • Genuine Parts Company
  • Leggett & Platt
  • Lowe’s Companies
  • McDonald’s
  • Ross Stores
  • Target
  • V.F. Corporation
  • Aflac
  • Cincinnati Financial
  • Franklin Resources
  • S&P Global
  • T. Rowe Price Group
  • Chubb
  • People’s United Financial
  • Air Products and Chemicals
  • Albemarle
  • Ecolab
  • PPG Industries
  • Sherwin-Williams
  • Nucor
  • Linde
  • Chevron
  • Exxon Mobil
  • Automatic Data Processing
  • Essex Property Trust
  • Federal Realty Investment Trust
  • Realty Income
  • AT&T
  • Atmos Energy
  • Consolidated Edison

How many dividend aristocrats are there?

The number of dividend aristocrats changes from year to year as companies join the group or fail to increase their dividends and fall out of the aristocracy. As of May, 2020, there are 66 members of the dividend aristocrats. Of those, seven were new members that year.

  • Amcor PLC
  • Atmos Energy Group
  • Realty Income Corp
  • Essex Property Trust
  • Ross Stores Inc
  • Albemarle Corp
  • Expeditors International of Washington Inc

Generally, companies join the list of dividend aristocrats in strong economies. During recessions, many companies can drop from the list. Between 2008 and 2020, 33 firms fell out of the dividend aristocrats, largely because of the economic downturn following the 2008 financial crisis.

Some firms that lost dividend aristocrat status include:

  • Pfizer
  • Bank of America
  • General Electric
  • KeyCorp

Is there a dividend aristocrats ETF?

Many people enjoy picking individual stocks based on criteria they believe will result in higher returns than the overall market. However, ETFs and mutual funds are a good way to diversify your investments between many different companies while only having to buy shares in a single security.

There are many different ETFs that track the dividend aristocrats and similar groups of stocks. Investing in these does come at a cost: you’ll have to pay the expense ratio of the fund. However, many ETFs that track simple indexes like the dividend aristocrats charge reasonably low fees and are an easy way to invest without having to manage your portfolio on your own.

What are some considerations when researching dividend aristocrats?

Deciding if and which dividend aristocrat to consider depends on your investing goals and the way that you want to structure your portfolio.

Some investors seek to focus on specific industries when building a portfolio, while others want to diversify their investment across a variety of industries. Because dividend aristocrats exist across industries, one can choose companies that let them build their desired portfolio.

Another thing to consider is that a company doesn’t always remain in the dividend aristocrats after joining. Companies can easily fall out of the list by failing to increase dividends for a year. Investors should do their due diligence and research any company that they want to invest in to make sure it has stable financials and potential for growth.

Even for historically stable companies with good long-term prospects, current share prices can affect whether investing is a good idea. The market may overvalue or undervalue a business, giving you the opportunity to get a great deal or to overpay.

Keep in mind that all investing is subject to risk and that you should do research on any company you may purchase shares in.

The securities mentioned in this article are for illustrative purposes only and not a recommendation to buy or sell any security, nor participate in any strategy. There is no guarantee that any investment strategy will be profitable. Past performance is not a guarantee of future results.

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Sign up for Robinhood and get your first stock on us.Certain limitations apply

The free stock offer is available to new users only, subject to the terms and conditions at rbnhd.co/freestock. Free stock chosen randomly from the program’s inventory. Securities trading is offered through Robinhood Financial LLC.

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