Dividend Aristocrats For Reliable Income And Growth

In a market environment with low yields,  investors may be better off with dividend-paying strategies as an excellent way to build wealth. Total return benefits from dividend income, potential dividend growth, and capital appreciation. Every well-balanced portfolio should contain high-quality dividend stocks along with growth stocks, bonds, real estate, and other assets.

When seeking high-quality names above-average yields and higher growth potential, there is no better place to look than investing in Dividend Aristocrats. In contrast to typical dividend stocks, Dividend Aristocrats provide favorable exposure to both growth and value stocks.

This elite group’s characteristics produce:

  • higher and more reliable dividend income.
  • consistent dividend growth.
  • lower volatility in market downturns.
  • favorable risk/return profile.
  • an inflation hedge.


What Are The Dividend Aristocrats?

When seeking dividend-paying stocks, the S&P 500 Dividend Aristocrats make an excellent investment choice. There are several requirements to become part of the Dividend Aristocrats. A company must be:

  • Listed in the S&P 500 Index.
  • Paid and raised its dividend (excluding special dividends) consecutively for 25 years or more.
  • The minimum market capitalization of at least $3 billion and liquidity of at least $5 million.


Dividend aristocrats began in 1989 with only 26 companies with high-quality dividend payers’ profiles based on their strong histories of revenue and earnings growth, solid business fundamentals, and strong company management.

By their very nature, dividend aristocrat companies have high-quality businesses with durable competitive advantages and respect their dividend histories. Typically, they sport favorable metrics, including dividend payout ratios, net debt to capital, and net profit margins.

The dividend aristocrat stocks share attributes of both growth and value investing, discussed in this article. We address the benefits of a dividend growth strategy here. 

Dividend Kings

An even more elite group of dividend payers are the Dividend Kings. A dividend king is a stock with 50 or more years of consecutive dividend increases. There are 31 companies that qualify as Dividend Kings, and there are several overlapping names that are on the Dividend Aristocrats list.

However, there are three differences as the Dividend Kings:

  • Do not have an ETF available.
  • Are not formally followed by the rating companies.
  • Do not have to be part of the S&P 500 index.


How To Buy Dividend Aristocrats

You can buy all of the dividend aristocrat stocks through ProShares S&P 500 Dividend Aristocrats ETF (NOBL) with an expense ratio of 0.35%. A $10,000 investment would cost $35 annually. Alternatively, you can pick stocks individually or by industry you are seeking for your diversified portfolio.

The industries represented in the group by percentage are:

  • Industrials 20.4%
  • Consumer Staples 19.8%
  • Materials 12.7%
  • Financials 11.2%
  • Health Care 10.3%
  • Consumer Discretionary 9.2%
  • Real Estate 4.5%
  • Utilities 4.3%
  • Energy 3.1%
  • Information Technology 3%
  • Communication Services 1.4%

The Dividend Aristocrats consist of some defensive sectors that complement tech growth stocks in any diversified portfolio.

In 2021,  65 companies are dividend aristocrats with some changes. More companies tend to fall off the list in weak economies, especially during the Great Recession. The Dividend Aristocrats’ dividend yield is usually 50 basis points above that of the S&P500 dividend yield, or closer to 2.5%. Many of the stocks carry yields in the 3+% range.

Pros of Dividend Aristocrats


1. Reliable Income Source With Above-Average Yields

Dividend aristocrats offer reliable income sources, backed by corporate boards that voted for at least 25 years of paying and increasing their dividends. These companies are high-quality, stable, large-cap, blue-chip companies that tend to be leaders in their industries. Their stocks offer a healthy balance of growth with higher yields than the S&P 500 for investors. 


2.  Dividend Growth Compounding

Compounding, or earning interest on interest in fixed income investments, is a powerful way to build wealth. It becomes even more mighty when you are talking about the benefits of a dividend growth strategy. Combining the growth of dividends per share, compounding reinvested dividends, and share price appreciation results in exponential growth.

Investors take a longer-term perspective in their investments when they anticipate rising dividend payments. This investment strategy aligns well with a Buy/Hold mentality. We discuss compounding along with other financial concepts you should know in this article.

3. Lower Volatility And Higher Total Return Potential  

Stocks that pay dividends tend to be less volatile than the broad market. As a group, dividend aristocrats exhibit defensive characteristics represented by sectors like utilities and consumer staples. Its beta tends to be below that of the S&P 500. Dividend aristocrats reflect value and growth with 56% exposure to value and 44% exposure to growth.

Since its inception, the S&P 500 Dividend Aristocrats capture more of the gains (92%) and less of the market losses (80%). Through the first quarter of 2021, S&P 500 Dividend Aristocrats’ total return was 11.46% versus 10.31% for the S&P 500 but less volatility (15.71% versus 16.49%).


4. Investor Confidence In Corporate Financial Health

When high-quality companies pay dividends and increase their payouts, it gives investors confidence in the stocks they hold. Companies that consistently pay and raise dividends are in excellent financial health, transparent about their revenue and earnings growth, and reflect superior financial discipline. 

Many of the dividend aristocrats, like 3M, have high dividend payout ratios in a 55%-60% range. This range is healthy rather than those companies with the highest payout rates and don’t necessarily perform the best. 

5.  Capital Preservation

Generally, dividend-paying stocks are less risky and hold up better during market corrections. Investors are virtually paid in dividends to wait it out through turbulent times rather than engage in panic selling. Companies represented in the dividend aristocrats group are high-quality leaders with strong management, growth, and consistently raising their dividends. As such, these stocks can help preserve and build wealth for investors.

6. Portfolio Diversification

We always stress how investors must have a diversified portfolio among different asset classes. 

Investing in dividend aristocrats (e.g., NOBL) provides exposure to growth and value through various industries. As dividend-paying stocks, they provide an income source to help balance exposure to growth stocks. 

7.  An Inflation Hedge

Stock investments tend to outpace inflation, with value stocks tending to do better than growth. Higher-yielding shares like dividend aristocrats will help investors to maintain purchasing power through income sources better. Also, some dividend aristocrats, notably materials and energy companies, can pass some of the inflationary effects into higher product prices. 

Alternatives like savings accounts or bonds will not do as well with high inflation.  Many companies pay dividends above the rate of inflation.  

8. Tax Advantages

Dividend-seeking investors realize tax advantages.  Investors pay capital gains rates rather than the higher ordinary tax rate. About a third or more of dividend aristocrats’ total return comes from dividends, with the remainder coming from share appreciation. Additionally, they are more likely to have longer-term perspectives and hold onto their stocks longer than a year, so price appreciation would also receive capital gains treatment. However, there is potential for change in the capital gains rate.

Cons of Dividend Aristocrats


1. Is The Dividend Safe?

Investors of dividend aristocrats rely on receiving dividends and realizing growth in that income source. The nature of inclusion in the list requires keeping up with at least 25 years of increasing dividends. Many companies have a track record of more than half a century. The companies and their boards are well aware that investors seek that consistency.

These companies have excellent track records of maintaining strong growth, even during recessions though some companies fall off the list. As all investors should know, past results don’t guarantee future performance.

Weak economies or strategic changes may require companies to address their longstanding commitment to dividends.  One company that is likely to lose its dividend status after 35 years is ATT. 

In May, ATT announced that its Warner Media entity and Discovery Communications would be forming a separate standalone entertainment company. This development will cause ATT to likely reduce its dividend payout from the 60s% to 40% range.     

While rare, dividend cuts and suspensions do happen even for Dividend Aristocrats.

2. Less Price Appreciation

Dividend aristocrats realize less price appreciation than non-dividend growth stocks, which are growing at substantial rates. Some industries represented by dividend aristocrats are slow-growing industries like the utilities, banks, oil, or some older companies.

 3. Tax Policy Changes

We think there is a chance that we will see changes in the capital gains tax rate but, we will leave it for the politicians to figure it out.

Final Thoughts

Dividend aristocrats are an elite group of high-quality companies that share attractive attributes for investors seeking higher growth potential benefitting from stable dividends that consistently grow.  

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