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What Are Dividend Aristocrats And How To Invest In Them

What Are Dividend Aristocrats And How To Invest In Them

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What are dividend aristocrats and how to invest in them? Read on to know.

If you’re an income investor, your portfolio most likely includes dividend-paying stocks that represent companies with stable earnings, solid fundamentals, and a strong track record of growth and profit.

No stock exemplifies these characteristics more consistently than an S&P 500 Dividend Aristocrat.

A Dividend Aristocrat must adhere to strict criteria, which include being a member of the S&P 500 and having a track record of consistently raising dividend payments for at least 25 years running.

This combination is significant because, since 1926, dividends have contributed 32% of the total return on the S&P 500. Studies by S&P Dow Jones Indices demonstrate that stocks that pay dividends outperform those that don’t on a risk-adjusted basis.

What are Dividend Aristocrats

A company that consistently increases the size of its dividend payment to shareholders is known as a dividend aristocrat and is included in the S&P 500 index.

If a company has consistently increased its dividend payments for at least 25 years, it is regarded as a dividend aristocrat.

Some fans of dividend aristocrats rank them based on additional criteria such as company size and liquidity, for example, having a market capitalization of over $3 billion.

High dividend-yielding companies are relatively uncommon, and they typically have very stable businesses. They frequently produce recession-proof goods, enabling them to continue making profits and paying dividends even as other businesses struggle.

At any given time, there are typically fewer than 100 dividend aristocrats. Only 65 dividend aristocrats were included in the Standard & Poor’s 500 in 2021. They can be found in a variety of industries, including construction, retail, oil and gas, and healthcare.

High-flying tech startups and established businesses hardly ever pay dividends. To maintain higher-than-average growth, their management teams prefer to reinvest any earnings back into the business. Some young businesses even operate at a net loss and lack the funds necessary to pay dividends.

Large, well-known businesses with steady profits are generally better dividend payers. Many people do not benefit from consistent, robust growth or rising stock prices.

These businesses typically distribute dividends on a regular basis as an alternative method of rewarding their shareholders.

What Are Dividend Aristocrats And How To Invest In Them
Image from Forbes

What Qualifications Must One Have To Become A Dividend Aristocrat?

Introduced in 2005, the S&P 500 Dividend Aristocrats Index tracks the performance of S&P 500 companies that have increased their dividend payouts for 25 years running and satisfy other criteria.

The index is made up of large-cap stocks from various industries. The presence of so many big blue chip stocks makes it a desirable investment for income seekers.

Compared to the broad-based S&P 500 benchmark, the range of stocks in the Aristocrats index provide higher risk-adjusted returns and better downside protection.

Although income investments typically favour value over growth, the Aristocrats exhibit both of these traits. Since 1999, the index has had exposure to a value of 57.55% and exposure to the growth of 42.44%.

A company’s stock needs to meet certain criteria in order to be an S&P 500 Aristocrat:

  • Be a part of the  S&P 500 Index
  • Maintain a $3 billion total market capitalization (float-adjusted)
  • Have a 25-year track record of increasing dividend payments
  • Maintain a $5 million average daily value traded (ADVT) for three months prior to index acceptance.

Each year’s list of eligible Dividend Aristocrat companies is recompiled by S&P Dow Jones Indices, and it is released on February 1st. To ensure diversification, the index is rebalanced every quarter with a 30% sector cap. To completely eliminate concentration risk for a single stock, all components are equally weighted.

Examples of Dividend Aristocrats

Dividend aristocrats can be assessed in a variety of ways by analysts as investments. They include a company’s ability to weather market downturns, the growth of its stock price over time, and its expectations for future success.

That implies that the dividend aristocrats are arranged in a fluid hierarchy. The top dividend aristocrats for 2021 were chosen by Forbes based on the predicted total future returns of the companies.

Keep in mind that these decisions, especially Exxon Mobil, were made before the collapse in oil prices in 2021 caused by the novel coronavirus’s spread.

In 2021, 65 stocks satisfy the requirements to be classified as dividend aristocrats. Several instances include:

  • AT&T (T)
  • Exxon Mobil (XOM)
  • Walgreens Boots Alliance (WBA)
  • AbbVie (ABBV)
  • IBM (IBM)
  • 3M (MMM)
  • Caterpillar (CAT)

Pros and Cons of Dividend Aristocrats

Investors seeking reliable income should look for a company that pays out an increasing dividend, as doing so is a sign that the business is financially stable. Keep in mind, though, that a dividend is a portion of a company’s profits that it pays to its owners (shareholders) in cash; any funds distributed as a dividend are not reinvestment in the company.

A business may choose not to reinvest in the company if it pays shareholders an excessively high percentage of its profits because there aren’t many opportunities for the business to grow. As a result, a dividend aristocrat might be missing out on growth opportunities or not have any at all to reinvest profits.

Additionally, when a company’s stock isn’t rising, management can use dividends to appease irate investors. However, if a dividend aristocrat can consistently increase the payout it gives to shareholders, it does imply some level of organic growth in order to finance those payments.

Pros of Dividend Aristocrats

  • Ensures that shareholders receive consistent income
  • Is a strong financial picture suggested by a positive signal.

Cons of Dividend Aristocrats

  • Growth opportunities may not be paid in lieu of dividends.
  • Lesser capital gains may result from dividend stocks.
  • The receipt of dividends is a taxable event.
What Are Dividend Aristocrats And How To Invest In Them
Image from Seeking Alpha

How To Invest In Dividend Stocks

If you’re interested in investing in dividends, you have two main options: select individual stocks on your own, or purchase a fund of dividend stocks.

If you choose to invest in individual stocks, you will have to put in a lot of effort to learn about the market, the company’s competitive advantage, the financials, and a variety of other topics. Finding the dividend yield and purchasing the stock are just the beginning of investing in individual stocks.

Most businesses pay dividends on a quarterly basis. Each quarter, through a press release or a filing with the Securities and Exchange Commission, the company’s board of directors formally announces the dividend and pay date (SEC). The funds are then directly transferred to your brokerage account.

You should be aware of the following significant dates if you plan to invest in individual stocks:

  • Record date: The dividend payment will be made to shareholders who are listed as such as of this day.
  • Ex-dividend date: As of today, shareholders who buy the stock will no longer be eligible to receive the subsequent dividend payment.
  • Date of payment: Investors will receive their dividend payment on this date.

Before the stock even trades, on the ex-dividend day, its price is reduced by the dividend’s amount. Days or occasionally weeks later, on the payment date, the dividend will then show up in your account.

Fund manager Pro Shares has an ETF specifically for that purpose, the S&P 500 Dividend Aristocrats ETF, if you’re looking to invest in Dividend Aristocrats through a fund (NOBL). The SPDR S&P Dividend ETF is another alternative (SDY). Dividends are paid out quarterly by both funds.

Being able to start with a full portfolio of dividend stocks is a major benefit of investing in a fund. Since every dollar you invest creates a portfolio of stocks for you, diversification will benefit you. Because of the diversification, there is less chance of one stock having a significant negative impact on your entire portfolio.

Additionally, unlike with individual stocks, you won’t need to monitor and analyze every position, which makes it much simpler to follow and a huge help to novice investors.

What To Be On The Lookout For When Purchasing Dividend Stocks

If you plan to invest in individual dividend stocks, you should pay close attention to the following:

  • Taxes: Unless they are kept in a tax-advantaged account like an IRA or 401(k), any dividends you receive are subject to taxation (k). Even if you reinvest your payouts into additional shares of the stock or fund, that remains the case. In comparison to ordinary income tax rates, qualified dividends are taxed at the lower capital gains rates.
  • Payout ratio: The percentage of a company’s profits that are distributed as dividends is known as the payout ratio. The dividend is more precarious the higher the ratio. A small decline in revenue, perhaps during a recession, could force a company that distributes 80% of its earnings to reduce its dividend. Take note of this figure. On the other hand, a low ratio enables a business to boost payouts even more quickly than earnings growth.
  • Eroding competitive position: Companies that pay dividends frequently have slow growth rates and few options for investing their excess cash flow. However, for others, the company’s core business may actually be contracting or it may not be reinvesting in it, which would mean that it is gradually losing its competitive edge in the market. As a result, even though the dividend appears to be increasing today, profitability may cause it to decrease tomorrow.

These are just a few of the main problems with dividend stocks; you should pay close attention to other facets of the particular company.

For investors in a dividend stock fund, these worries are mostly unimportant because the fund is made up of numerous companies, with the exception of tax concerns.

Final Thoughts

It’s challenging to find dividend stocks with a better track record than the Dividend Aristocrats. Although each company must still be carefully examined, these stocks can be a great place to start your research on interesting dividend-paying businesses.

Check out funds that invest in these dividend giants if you prefer the straightforward but still profitable route.

Pained by financial indecision? Want to invest with Adam?

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Adam is an internationally recognised author on financial matters, with over 760.2 million answer views on Quora.com, a widely sold book on Amazon, and a contributor on Forbes.



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