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The Dividend Aristocrats Investment Strategy

Last updated by on January 2, 2016

We recently covered the basics of dividend investing. I didn’t get in to the “how to”, so in this post I’ll cover the individual stock or passive dividend investment strategy that focuses on investing in companies that have a long history of raising their dividend – the Dividend Aristocrats.

S&P has long produced a list of “Dividend Aristocrats” to highlight companies that have a strong track record of increasing their dividends over history. In order to make the Dividend Aristocrat list, there is one simple criteria:

Dividend Aristocrat = a company that has raised its annual dividend each of at least the last 25 years.

If a company has previously made the Dividend Aristocrat list and fails to raise their annual dividend, they fall off the list, and are not eligible to return until they reach another 25 consecutive year streak.

Dividend Yield Chasing

dividend aristocratsWhy worry about this Dividend Aristocrat concept that puts an emphasis on consistent dividend growth? Why don’t we just pull up a stock screening tool and sort by dividend yield and choose the 10 highest yielding stocks so we can work in some younger companies too? Sounds like a good plan, right?

Not exactly.

If you simply chase high dividend yields, you could be setting yourself up for failure. Here are a few reasons why you don’t want to do that:

  1. Stock Reliance on Yield: Many companies keep inflated yield payouts to prevent their stock price from tanking, even if their financials aren’t strong enough to sustain the payouts. Eventually those companies crash, and when they do, they crash hard. Take Radioshack, for example. They had raised their dividend to about a 10% yield. Meanwhile, profits had been declining, until finally they reported losses, and then cut their dividend altogether. Now, their stock is at a 30 year low AND there’s no dividend.
  2. Past vs. Present or Future: Sometimes the yield is so high because that company’s stock price has already tanked and the previous dividend payout will likely not continue. The company may have already alluded to cutting their dividend, but the stock portal you are looking at is likely calculating yields on trailing dividends.
  3. Diversification: Certain sectors carry higher yields than others. Many mortgage REIT’s, for example, currently have yields exceeding 10%. This is because interest rates are at historic lows. If interest rates were to rise, their profits, dividend payouts, and stock price would likely decline. If you were to simply seek out the 10 highest yielding stocks, you’d probably end up with 10 mortgage REIT’s. The danger in this strategy is that you have virtually no diversification. If you were to buy today and interest rates rose tomorrow, your entire portfolio would take a huge hit.

Dividend yield chasing is not a sound investment strategy.

Enter the “Dividend Aristocrats”

If you’re a beginning dividend investor who wants to choose individual stocks, you could do a whole lot worse than starting with the Dividend Aristocrat list. Here’s why making this list has significance:

  • It indicates that the company has historically had a strong financial history in order to raise dividends for that many consecutive years. This could always change, but 25 years is worth something.
  • It indicates the company is committed to giving back to its shareholders.
  • It ignores dividend yield. The overall Dividend Aristocrat yield is 2.73%, which is good, but not off the charts (the S&P 500 yields 2.10% as a comparison). A company could have a 1.5% yield, but if it’s still able to make this list, that means its stock has likely appreciated significantly as well due to capital growth vs. simply high dividend payouts. You will find many growing companies on the list.
  • These stocks tend to be less risky vs. the broader market. In the Great Recession, their prices dropped much less significantly than the broader market as investors flock to them in bad times. In good times and bad, they just keep raising dividends.
  • It is sector diverse. In the chart below, you can see the sector breakdown. Consumer staples make up the highest allocation at 25.3%, and that’s because those companies are fairly recession proof.

dividend aristocrat list

On to the Dividend Aristocrat list…

Dividend Aristocrat List

The S&P 500 updates their list annually each December. 2012 was a good year as 10 companies were added to the list (AT&T, Colgate-Palmolive, Franklin Resources, Genuine Parts, HCP, Illinois Tool Works, Medtronic, Nucor, Sysco, and T. Rowe Price Group) and only one (Centurylink) fell off, bringing the total number of 2012 Dividend Aristocrats to 54.

Who makes the 2012 Dividend Aristocrat list?

  • 3M Co (MMM)
  • AFLAC Inc (AFL)
  • Abbott Laboratories (ABT)
  • Air Products & Chemicals Inc (APD)
  • Archer-Daniels-Midland Co (ADM)
  • AT&T (T)
  • Automatic Data Processing (ADP)
  • Bard, C.R. Inc (BCR)
  • Becton, Dickinson & Co (BDX)
  • Bemis Co Inc (BMS)
  • Brown-Forman Corp B (BF/B)
  • Chubb Corp (CB)
  • Cincinnati Financial Corp (CINF)
  • Cintas Corp (CTAS)
  • Clorox Co (CLX)
  • Coca-Cola Co (KO)
  • Colgate-Palmolive Company (CL)
  • Consolidated Edison Inc (ED)
  • Dover Corp (DOV)
  • Ecolab Inc. (ECL)
  • Emerson Electric Co (EMR)
  • Exxon Mobil Corp (XOM)
  • Family Dollar Stores Inc (FDO)
  • Franklin Resources Inc (BEN)
  • Genuine Parts Company (GPC)
  • Grainger, W.W. Inc (GWW)
  • HCP Inc (HCP)
  • Hormel Food Corp. (HRL)
  • Illinois Tool Works Inc (ITW)
  • Johnson & Johnson (JNJ)
  • Kimberly-Clark (KMB)
  • Leggett & Platt (LEG)
  • Lowe’s Cos Inc (LOW)
  • McCormick & Co. (MKC)
  • McDonald’s Corp (MCD)
  • McGraw-Hill Cos Inc (MHP)
  • Medtronic Inc (MDT)
  • Nucor Corp (NUE)
  • PPG Industries Inc (PPG)
  • PepsiCo Inc (PEP)
  • Pitney Bowes Inc (PBI)
  • Procter & Gamble (PG)
  • Questar Corp (STR)
  • Sherwin-Williams Co (SHW)
  • Sigma-Aldrich Corp (SIAL)
  • Stanley Works (SWK)
  • Sysco Corp (SYY)
  • T Rowe Price Group Inc (TROW)
  • Target Corp (TGT)
  • VF Corp (VFC)
  • Wal-Mart Stores (WMT)
  • Walgreen Co (WAG)

Dividend Aristocrat ETF’s?

I’ve discussed passive index investing via ETF’s as a great way to cut down on trading commissions. There is no Dividend Aristocrat ETF that follows all stocks on the Aristocrat list, but there are some close options:

SPDR S&P Dividend (SDY): This dividend ETF “is designed to measure the performance of the highest dividend yielding S&P Composite 1500  Index constituents that have followed a managed-dividends policy of consistently increasing dividends every year for at least 20 consecutive years”. It has a 0.35% expense ratio and a 2.27% dividend yield.

Vanguard High Dividend Yield (VYM): This dividend seeks to track the performance of the FTSE High Dividend Yield Index, which measures the investment return of common stocks of companies characterized by high dividend yields. It does not track the Dividend Aristocrat list as it aims to go after high yielders, but there is definitely a lot of crossover. It has a 0.10% expense ratio and a 2.93% yield.

There are a number of other dividend ETF’s that I’ll highlight in an upcoming post.

If you’re interested in a Dividend Aristocrat ETF, check out my article on commission-free ETF trading before purchasing.

The Aristocrats!!!

Dividend Aristocrat Discussion:

  • Do you like the Dividend Aristocrat investment strategy?
  • Have you used it previously or do you plan to?
  • Do you currently own any stocks that make the Aristocrat list?

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About the Author
I am G.E. Miller, & this is my story. My goal is financial independence ASAP. If you share that goal, join me & 10,000+ others by getting FREE email updates. You can also explore every post I have written, in order.

  • William @ Drop Dead Money says:

    One other thing to consider is preference shares. Not aristocrats by this definition, but overlooked nobility nevertheless. 🙂 Constant dividends ain’t ain’t bad, and they usually start with a higher yield right away, because there’s no growth multiple factored into their prices. Just a thought…

  • Niels Bohr says:

    Once I have my nest egg I’m thinking of moving it all into a wide set of dividend stocks and never looking at them again. As long as the absolute dividend amount increases each year by more than inflation, as I think a lot of these aristocrats do, I won’t have to worry about the stock price, or the yield, or ever touching the principle.

  • This is my strategy. Since I’m a newbie investor and don’t fully understand how to evaluate a stock, I feel much more comfortable investing in the Dividend Aristocrats. I’m not going to make a ton of money off of a tiny company that skyrockets, but I’m also not going to lose a ton of money on a tiny company that fails. I’d rather invest in companies that have a proven record of excellence, even if it means I’ll never strike it rich on “the next big thing.”

  • Ornella @ Moneylicious says:

    As with any ratio when evaluating a company it only tells one part of the story. And you definitely pointed that out in this post. Starting with the Dividend Aristocrat is good start for newbie investor. It’s a good way to beging to get your feet wet as you build up a dividend portfolio.

  • Peh Peh says:

    I am about the same age as the author of this blog. With the exception of my 403b I am all in the dividend investing. I would say that it’s much more than just what company has good dividends and has sustained them for years. It’s also just as much the annual growth rate of that dividend. That’s the part that really add up over the years. It’s the consistency of the rate as well. PG is a good example long term. They consistently raise the dividend 8-10%/year. Best to buy at a good price of course.


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