What Is a Dividend Aristocrat?
A dividend aristocrat is a company in the that not only consistently pays a dividend to shareholders but annually increases the size of its payout.
Key Takeaways
- A company is a dividend aristocrat if it increases the dividend it pays to shareholders for at least 25 straight years.
- A dividend aristocrat must also be a member of the S&P 500, and some investors may add additional screening criteria.
- They tend to be large, established companies that no longer enjoy supercharged growth.
- Many are largely recession-proof, enjoying steady profits and growing dividends in good times and bad.
- Dividend aristocrats are similar to dividend kings, which are firms increasing dividends annually for more than 50 years.
Understanding Dividend Aristocrats
Companies that can maintain high dividend yields are relatively rare, and their businesses are usually very stable. They tend to have recession-proof products, allowing them to keep taking in profits and paying dividends even while other companies are struggling.
Startup companies and high flyers in technology rarely offer dividends at all. Their management teams prefer to reinvest any earnings back into the operations to help sustain higher-than-average growth. Some fledgling companies even run at a net loss and don’t have the cash on hand to pay dividends.
Large, established companies with predictable profits are better dividend payers in general. Many do not enjoy regular, robust growth or a constantly rising stock price. These companies tend to issue regular dividends as an alternative way of rewarding their shareholders.
A company will be considered a dividend aristocrat if it raises its dividends consistently for at least the past 25 years. Some aficionados of dividend aristocrats rank them according to additional factors such as company size and liquidity, for instance having a market capitalization over $3 billion.
Dividend Aristocrats 2024
Analysts have many ways to evaluate dividend aristocrats as investments. They include the growth of the stock prices of companies over time, their resilience to a downturn in the stock market, and their expectations for future prosperity. That means there is an ever-changing hierarchy among dividend aristocrats.
Many different publishers will quote lists of dividend aristocrats. For example, FinanceCharts noted that in September 2024, Altria Group (MO) was the highest-yielding dividend aristocrat. Other companies that made the list with the highest yield include:
- Enterprise Products Partners LP (EPD)
- Enbridge (ENB)
- First of Long Island (FLIC)
- Universal Health Realty Income Trust (UHT)
- Franklin Resources (BEN)
Some larger companies may not have as high of a yield but are still considered dividend aristocrats. Those companies, ranked by market cap as of September 1, 2024, include but aren't limited to:
- Walmart (WMT)
- Exxon Mobil (XOM)
- Procter & Gamble (PG)
- Johnson & Johnson (JNJ)
- Coca-Cola (KO)
- Chevron (CVX)
- PepsiCo (PEP)
Two ways to track the performance of these stocks include the S&P Dividend Aristocrats index and the S&P High-Yield Dividend Aristocrats index.
Advantages and Disadvantages of Dividend Aristocrats
A company that pays out an ever-increasing dividend is ideal for investors looking for stable income, and being such a company is a positive signal that the firm is on sound financial footing. Remember, however, that a dividend is a portion of a firm's profits that it is paying to its owners (shareholders) in the form of cash—any money that is paid out in a dividend is not reinvested in the business.
If a business is paying shareholders too high a percentage of itsprofits, it may be a sign that management prefers not to reinvest in the company given a lack ofgrowth opportunities. Therefore, a dividend aristocrat may be squandering growth opportunities, or not have any such opportunities to redirect profits.
Moreover, company management can use dividends to placate frustrated investors when the stock isn't appreciating. That said, if a dividend aristocrat is able to grow the payout it gives to shareholders on a regular basis, it does imply some organic level of growth in order to fund those payments.
Pros
Provides stable income for shareholders
Is a positive signal indicating strong financials
Cons
Dividends may be paid in lieu of growth opportunities
Dividend stocks may produce lesser capital gains
Dividend payments are taxable events
Dividend Aristocrats vs. Dividend Kings
Similar to the dividend aristocrats, "dividend kings" are companies that are known for paying out dividends consistently over time. While a dividend aristocrat must be a member of the S&P 500 and have an increasing dividend payout over 25 years or more, to qualify as a dividend king a firm must only meet one hurdle: paying an increasing dividend consistently for at least 50 years.
Some dividend kings will also be dividend aristocrats, and not all aristocrats will be dividend kings (for instance, they have not been around for 50 years or are not in the S&P 500). It is less common for companies to consistently increase their dividends for over half a century, so the number of dividend kings tends to be fewer than their aristocrat cousins.
Identifying Other Quality Dividend Payers
In general, companies have dividend policies that fall into three categories: A stable dividend policy, a constant dividend policy, or a residual dividend policy.
- If a company has a stable dividend policy, the shareholder can expect steady and predictable dividend payouts every year, regardless of fluctuations in the company's earnings.
- If it has a constant dividend policy, the company pays a percentage of its profits to shareholders every year, so investors experience the full volatility of company earnings.
- If it has a residual dividend policy, the company pays out in dividends whatever money remains after it has taken care of its capital expenditures and working capital.
How Can You Build a Dividend Aristocrat Portfolio?
All companies that are dividend aristocrats are members of the S&P 500, and so one can identify those stocks and construct a dividend-focused portfolio. In September 2024, FinanceCharts noted there were 135 such stocks.
How Much of a Portfolio Should You Dedicate to Dividend Aristocrats?
The weight given to dividend stocks will depend on several factors, including your risk tolerance, time horizon, need for current income, and tax situation. Because dividend aristocrats tend to be large, mature companies with fewer growth prospects, they can be less volatile but also carry lower expected returns. Retired individuals may especially benefit from the relatively lower risk and additional income that these stocks provide.
Do Dividend Aristocrats Outperform the Market?
This will depend on the period examined. Very generally speaking, dividend aristocrats are not known for their capital appreciation, so it's important to be mindful of comparing total return against total return.
Is It Good to Invest in Dividend Aristocrats During a Recession?
One perspective is that since these companies are mature and have weathered economic downturns before, increasing dividends during recessions no less, it can make sense to seek these stocks out as safe havens while growth stocks flounder. However, consider the broader implications for the company. For example, Johnson & Johnson relies on personal consumption; if people cut back on spending on certain items, this may negatively impact a dividend aristocrat like JNJ.
The Bottom Line
Dividend Aristocrats are a select group of companies in the S&P 500 that have consistently increased their dividends for at least 25 consecutive years. They are often seen as reliable, stable investments, offering a blend of income and long-term growth potential.
