What Are the Dividend Aristocrats?

What Are the Dividend Aristocrats?

by Doug Gerlach, Editor-in-Chief

Investors who focus on dividends often turn to lists such as the “Dividend Aristocrats” for portfolio ideas. Just what are the Dividend Aristocrats? Can we trust these companies to be a fertile source of investment returns?

Reprinted from the Dividend Informer newsletter

S&P Dow Jones Indices maintains the “official” list of Dividends Aristocrats. For a company to be included on the roster, it must be a member of the S&P 500 index and must have increased its dividend annually for at least 25 consecutive years. In addition, the company must maintain a market capitalization of $3 billion or greater and have an average daily trading volume of at least $5 million for the trailing three-month period before each quarterly rebalancing.

The Dividends Aristocrats list is updated regularly to add new members who have recently met the criteria by reaching their 25th year of dividend hikes. In some cases, newly-traded companies have been added after spinning off from a parent on the list.

Companies are also removed from the list if they cut their dividend or leave the public market by merger or acquisition. In February 2023, VF Corp. (VFC) was dropped after the company cut its dividend following more than 50 years of increases.

At year-end 2023, there were 66 companies on the S&P sanctioned list of Aristocrats.

Why 25 Years?

There is no real statistical reason why the Aristocrats list only includes companies who have increased dividends for 25 straight years, other than a quarter of a century being a memorable number. It might be argued that 10 or 20 years is a suitably long period to consider a company’s dividend policies, or perhaps 30 years is a better indicator.

Other fanciful categories of dividend payers have been created, such as the “Dividend Monarchs” (formerly known as “Dividend Kings”), also managed by S&P. The 36 companies on this list have had 50 years of consecutive dividend increases.

The “Dividend Achievers” is a list created by Nasdaq that includes companies with ten years of dividend growth. Around 300 companies from the NYSE and Nasdaq are currently on this list.

Limitations of the Dividend Aristocrats

The lowest yielding Aristocrat right now is paying an annual dividend of 0.24%. That is hardly interesting from a dividend or capital allocation perspective. The entire Index currently yields about 2.7%, a lower annual cashflow than many dividend investors try to achieve.

Dividend aristocrats are usually mature companies, often well past their prime. These companies may offer limited future opportunities for fundamental revenue and earnings growth, which in turn reduces the potential for future total return as well.

A Better Approach to Dividends

Dividend investing is about more than steady income generation. There are many benefits that come from owning these stocks. Dividend payers may offer purchasing power protection against inflation or serve as a partial hedge against down markets, for instance.

In the Dividend Informer, we seek out reasonably valued companies with solid balance sheets and significant free cash flow generation, that are almost always still in “growth” mode. After all, a history of earnings growth is a prerequisite for growing dividends over time. In addition to the factors that contribute to share price growth, we also look for companies that are returning significant capital to shareholders via share repurchases and debt reduction.

In this way, we aim to generate annual income along with long-term returns that exceed the averages of stocks that are purchased purely from an income perspective.

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