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What Is a Dividend Aristocrat?

Millions of investors own stocks that regularly pay out dividends of varying amounts per share, but few are familiar with an elite class of dividend stocks known as Dividend Aristocrats.

In this article, we'll break down exactly why Dividend Aristocrats are so attractive to investors and share a few aristocrat stocks that could help unlock the full potential of your portfolio.

What is a dividend?

A dividend is a payment from a company's profits to its shareholders. Just as all stocks are created differently, so are dividends. Different companies pay out different dividend amounts. For example, if a company pays 3% of its total stock price each quarter, an investor with $100 in that stock gets $3 back every quarter. Of course, this number can fluctuate vastly depending on a company's success.

Not all companies pay their investors dividends. Typically, the companies that offer consistent and increasingly higher dividend yields are older and more established businesses. These are companies that have been around for decades, perhaps even centuries, and can afford to let go of some of their liquid capital each quarter without needing to immediately reinvest it in the business to fund things like research, development, marketing, or paying off debt.

A special collection of established and reliable companies known as Dividend Aristocrats can help make investing in dividends a relative no-brainer.

Image Source: Getty Images.

What are Dividend Aristocrats?

The term "Dividend Aristocrats" is trademarked by the financial firm Standard & Poor's, and S&P maintains strict definitions for several classes of aristocrat stocks. Most commonly, though, investors who are referring to Dividend Aristocrats colloquially are talking about companies on the S&P 500 index that have increased their dividend payouts for 25 consecutive years or more, at least once a year. These companies have never decreased their dividend payout to shareholders during that time.

First established in 1989, this index contained the most stocks in 2001, but given considerable changes in dividend policy among companies over the past two decades or so, the list has undergone significant scale-backs and revisions.

The number of companies on the list tends to coincide with historically significant bear markets. For example, the initial list of just 26 companies was published 25 years after the down years of 1973-1974. That tough economy very likely forced many companies to freeze or drop their dividends, disqualifying them from the original list 25 years later. Likewise, the list peaked in 2001 at 64 and again at 60 in 2008. The recessions that immediately followed those peaks once again forced numerous Dividend Aristocrats off the list.

Many stocks listed on the index are familiar household names. Coca-Cola, ExxonMobil, and McDonald's have all managed to retain their status as Dividend Aristocrats for more than a quarter of a century. There are 57 companies on the list currently, with the consumer staples category containing the most. These include companies like The Clorox Company, Colgate Palmolive, Kimberly Clark, and PepsiCo. But industrials don't trail far behind, making up more than a fifth of the companies listed. Think 3M, General Dynamics, and Stanley Black and Decker.

The list of Dividend Aristocrats tends to fluctuate semiregularly, with new companies being added (and, unfortunately, occasionally subtracted) every year. Here's a full list of the S&P 500 Dividend Aristocrats as it stood in August 2019:

Company Sector
3M (NYSE: MMM)
Industrials
Aflac (NYSE: AFL) Financials
AT&T (NYSE: T) Communications services
AbbVie (NYSE: ABBV) Healthcare
Abbott Laboratories (NYSE: ABT) Healthcare
Air Products & Chemicals (NYSE: APD) Materials
A.O. Smith (NYSE: AOS) Industrials
Archer Daniels Midland (NYSE: ADM) Consumer staples
Automatic Data Processing (NASDAQ: ADP) Information technology
Becton, Dickinson & Co. (NYSE: BDX) Healthcare
Brown-Forman (B Shares) (NYSE: BF-B) Consumer staples
Cardinal Health (NYSE: CAH) Healthcare
Caterpillar (NYSE: CAT) Industrials
Chevron (NYSE: CVX) Energy
Chubb Limited (NYSE: CB) Financials
Cincinnati Financial (NASDAQ: CINF) Financials
Cintas (NASDAQ: CTAS) Industrials
Clorox (NYSE: CLX)
Consumer staples
Coca-Cola (NYSE: KO)
Consumer staples
Colgate-Palmolive (NYSE: CL)
Consumer staples
Consolidated Edison (NYSE: ED) Utilities
Dover (NYSE: DOV) Industrials
Ecolab (NYSE: ECL) Materials
Emerson Electric (NYSE: EMR) Industrials
ExxonMobil (NYSE: XOM)
Energy
Federal Realty Investment Trust (NYSE: FRT) Real estate
Franklin Resources (NYSE: BEN) Financials
General Dynamics (NYSE: GD)
Industrials
Genuine Parts (NYSE: GPC) Consumer discretionary
Grainger W.W. (NYSE: GWW) Industrials
Hormel Foods (NYSE: HRL) Consumer staples
Illinois Tool Works (NYSE: ITW) Industrials
Johnson & Johnson (NYSE: JNJ) Healthcare
Kimberly Clark (NYSE: KMB)
Consumer staples
Leggett & Platt (NYSE: LEG) Consumer discretionary
Linde plc (NYSE: LIN) Materials
Lowe's (NYSE: LOW) Consumer discretionary
McCormick & Co. (NYSE: MKC) Consumer staples
McDonald's (NYSE: MCD)
Consumer discretionary
Medtronic plc (NYSE: MDT) Healthcare
Nucor (NYSE: NUE) Materials
PPG Industries (NYSE: PPG) Materials
Pentair plc (NYSE: PNR) Industrials
People's United Financial (NASDAQ: PBCT) Financials
PepsiCo (NASDAQ: PEP)
Consumer staples
Procter & Gamble (NYSE: PG) Consumer staples
Roper Technologies (NYSE: ROP) Industrials
S&P Global (NYSE: SPGI) Financials
Sherwin-Williams (NYSE: SHW) Materials
Stanley Black & Decker (NYSE: SWK)
Industrials
Sysco (NYSE: SYY) Consumer staples
T. Rowe Price Group (NASDAQ: TROW) Financials
Target (NYSE: TGT) Consumer discretionary
United Technologies (NYSE: UTX) Industrials
VF Corp. (NYSE: VFC) Consumer discretionary
Walgreens Boots Alliance (NASDAQ: WBA) Consumer staples
Walmart (NYSE: WMT) Consumer staples

Source: S&P Dow Jones Indices.

Why Dividend Aristocrats make strong investments

Not just any company is capable of increasing its dividend for 25-plus years. The sustained success required is, almost by definition, next to impossible. Only around 10% of companies on the S&P 500 qualify today, after all. To achieve such a feat, a company must be consistent and resilient and have strong competitive advantages and excellent capital allocation.

Economically speaking, this means a company must have a demonstrated record of raising its earnings and cash flow and sharpening its balance sheet to make those payments to its eager investors. That combination of factors leads to strong fundamental performance first. The dividend strength is a reflection of those fundamentals, not the other way around. In other words, a company doesn't become successful because it offers dividends; a company offers dividends because it is successful.

How Dividend Aristocrats benefit your returns

When it comes to Dividend Aristocrats' yield, a couple of percentage points might not sound like much: 3% of a $100 stock barely buys you a candy bar at your local gas station. But it's not just about how high a yield is. One should also consider the payout ratio, which is how smart investors examine a company's sustainability. Mathematically speaking, a payout ratio is calculated by dividing dividends per share (DPS) by earnings per share (EPS).

Let's look at an example. Say a company has earnings per share of $5 and dividends per share of $2. Its payout ratio would therefore be 40%.

Investors use this figure to determine the sustainability of the company's business. The higher its payout ratio is, the more a company is spending to maintain its dividend payments. If, for example, a stock's payout ratio is 100%, it means the company is spending all of its earnings on paying investors dividends. This is an unsustainable model for obvious reasons.

But Dividend Aristocrats are different. They're resilient, established companies with proven records. They're bringing in sustainable income, and we can mostly trust that they aren't going anywhere. They can afford to toggle their dividend payout ratio -- and consistently raise it -- without upsetting their balance sheets.

Many of the companies listed as Dividend Aristocrats, therefore, have been in business for decades. Some, like 3M, Coca-Cola, and PepsiCo have lasted more than a century. Dividend aristocrats also tend to follow the S&P 500, many times outperforming it. Since many of these companies are also on the S&P 500, it makes sense that the Dividend Aristocrats would follow such a reliable trend. However, not all companies on the S&P offer dividends, and those that do haven't necessarily maintained an increasing dividend yield for more than 25 years. Investing in an index of these elite and reliable companies, therefore, makes for a smart bet in the long run.

Data source: YCharts.

Like any other stock, Dividend Aristocrats are subject to market change. An argument can be made that such mammoth companies are under more pressure -- and therefore are criticized more for a misstep or underperformance -- because they are hailed as such sustainable and sound investments. Any mistake is recorded, analyzed, and often mentioned on TV, heightening an audience's awareness. For instance, if Coca-Cola makes a bad bet on a new product, the market notices more than if a lesser-known company or one that's only recently gone public makes the same ill-advised judgment call. But it's not all bad for Coca-Cola or for its investors. The company's stock is capable of absorbing mistakes better than a new company can, since it has a proven track record and has likely weathered similar errors in the past.

Dividend aristocrats are therefore good (or, at least, better) bets if you're trying to sift through the noise of a constantly fluctuating market. This isn't to say they're bulletproof, but they are resistant to nuanced daily fluctuations and have been around for generations. And since they've demonstrated a repeated ability to line investors' pockets with a little extra cash -- just for putting their trust (and money) with them -- they enjoy a coveted consumer confidence that few other companies have.

Dividend Kings

Investors have come up with other terms to talk about stocks with even more impressive dividend histories. For instance, Dividend Kings are an exclusive grouping of companies that have raised their dividends for 50 or more years, every single year. That's no small feat when you consider how vastly stocks can fluctuate on a day-to-day basis, let alone year to year. Consider what the market has seen over the past 50 years: global unrest, wars, rising interest rates, falling interest rates, historic highs, lows, 10 presidencies, a technological boom, automation, disruption, disruption, disruption. And somehow, these companies have weathered it all. It's amazing to consider, really. And the list is always changing. It's not easy being king, and very few retain the crown.

As of this year, only 26 companies are considered Dividend Kings. They are:

Company Sector
3M Industrials
American States Water (NYSE: AWR) Utilities
Commerce Bancshares (NASDAQ: CBSH) Financials
Cincinnati Financial (NASDAQ: CINF) Financials
Colgate-Palmolive Consumer staples
California Water Service (NYSE: CWT) Utilities
Dover Industrials
Emerson Electric Industrials
Farmers & Merchants Bancorp (OTC: FMCB) Financials
Federal Realty Investment Real estate
Genuine Parts (NYSE: GPC) Consumer discretionary
Hormel Foods Consumer staples
Johnson & Johnson Healthcare
Coca-Cola Consumer staples
Lancaster Colony (NASDAQ: LANC) Consumer staples
Lowe's Consumer discretionary
Nordson (NASDAQ: NDSN) Industrials
Northwest Natural Holding (NYSE: NWN) Utilities
Procter & Gamble Consumer staples
Parker-Hannifin (NYSE: PH) Industrials
Stepan (NYSE: SCL) Basic Materials
SJW Group (NYSE: SJW) Utilities
Stanley Black & Decker Industrials
Target Consumer staples
Tootsie Roll Industries (NYSE: TR) Consumer staples

Source: dripinvesting.org.

Keep in mind that being a Dividend King does not make a company a Dividend Aristocrat. This sounds counterintuitive, since it seems as if companies that managed to double the Dividend Aristocrats' 25-year track record should fit seamlessly into the category. But at least as strictly defined, Dividend Aristocrats belong to the S&P 500 and therefore also must be American-based companies of a certain market cap, whereas Dividend Kings are measured only by their dividend records.

Drawbacks of Dividend Aristocrats

When it comes to the market, everyone has an opinion. And when we're talking about Dividend Aristocrats, even though they may seem too good to be true, many investors see a certain drawback to investing only in stocks that offer such steady dividends.

One common critique of Dividend Aristocrats is that they're unimaginative. Plenty of people say that these payouts are a waste of money, since companies will never see a tangible return from their generosity. Rather than reinvesting extra capital in their own business for something like marketing, research and development, expansion, or other areas of improvement, the common complaint is that these companies just send money out the door without putting it to work for them.

This criticism is somewhat valid; it certainly adds up when a company like PepsiCo regularly gives away almost $4 on every share. But these are huge companies, many of which have been around for more than a century. Sure, Coca-Cola, PepsiCo, and Caterpillar can continue to expand -- at least marginally -- and continue to acquire smaller companies in the name of growth. But on a macro level, most Dividend Aristocrats have already hit their critical mass. How many countries have at least one McDonald's within their borders? (Answer for your next cocktail party: 117 and counting.)

There's still at least marginal room to grow, but these hugely lucrative companies don't need to reinvest each and every penny they make in their businesses to keep their heads above water. Newer companies, disruptors, and less profitable ones do.

It's also worth noting that while offering dividends isn't inherently risky, it does mean that a company repeatedly raising its dividend has a larger target on its back. When companies randomly slash their dividends dramatically with little forewarning (yes, it happens), investors panic, which can drive a stock price down.

Newer companies such as Netflix or Lyft might be exciting, but it's far riskier to overweight your portfolio with relatively untested, high-growth stocks like those than to stick with companies that have slower growth but proven records and steady dividends. Aristocrats, therefore, are slow and safe bets.

So what does it all mean?

Put simply, investing in Dividend Aristocrats is a Foolish (with a capital F!) way to invest! No, filling your portfolio with tons of shares of Johnson & Johnson probably won't make you rich overnight. Overweighting your portfolio with one company would not only be risky, but it would also take the fun and creativity out of investing!

Instead, we suggest doing your homework:

  • Pick a dozen or so stocks from this list and research them thoroughly.
  • Use our knowledge center and read about our top 3 dividend stocks to buy this year and hold forever.
  • Look beyond share prices and past performance.

Sure, this research will provide indicators as to whether purchasing a particular stock is a good idea, but it won't tell the whole story. Take the individual dividend yield percentage into account, consider a company's mission and whether you believe in it, and remember the most important factor to any company's success: its leadership. As we always say, a CEO is the most important key to a business's success in the long run. So if you don't like a company's CEO, board, or long-term vision, consider skipping it altogether.

Adding Dividend Aristocrats to your portfolio and sitting on them for the long haul isn't necessarily foolproof. Market downturns, busts, and recessions can still happen. But Aristocrats will deliver a small amount of steady and reliable income as your portfolio grows (and your companies succeed) over the years. And when the market inevitably corrects or a black-swan event shocks the world (let's hope it doesn't, but it's best to be prepared), you'll be glad you tucked away a few safe bets that bolster your portfolio with a little extra cash for a rainy day.

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Jena Greene has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Netflix. The Motley Fool owns shares of Nordson. The Motley Fool is short shares of Clorox, Colgate-Palmolive, Kimberly-Clark, and Procter & Gamble. The Motley Fool recommends 3M, Aflac, Becton, Dickinson, Cintas, Ecolab, Johnson & Johnson, Lowe's, McCormick, Nucor, Roper Technologies, and Sherwin-Williams. The Motley Fool has a disclosure policy.


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