Dividend Aristocrats: What they are and how to invest in them

Dividend Aristocrats are a special category of dividend-paying stocks with a long track record of making – and increasing – their payouts. Because of their stable and rising payouts, a collection of these dividend dynamos can form the basis of a lucrative income-paying portfolio.

Here’s what Dividend Aristocrats are and why they may be just what your portfolio needs.

What are Dividend Aristocrats?

Dividend Aristocrats are some of the most stable dividend payers in the stock market. To qualify as a Dividend Aristocrat, a company needs to meet the following criteria:

• Be part of the Standard & Poor’s 500 Index
• Pay and raise its dividend for at least 25 straight years
• Have a market capitalization of at least $3 billion
• Have an average daily trading volume of at least $5 million

These criteria ensure that only relatively large, stable companies make the cut for being an aristocrat. So the list of Dividend Aristocrats is composed of large-cap stocks with solid, cash-generating businesses. These companies are usually slow-growth, meaning they don’t have many places to reinvest their free cash flow, allowing them to pay it out to shareholders.

Because of this, you’re not likely to find the next hyper-growth company among this group, but you will tend to find companies with resilient business models that can keep the cash flowing.

And as impressive as being a Dividend Aristocrat sounds, there’s a group for those companies that go a step further, increasing their payouts for 50 straight years – Dividend Kings.

Top-yielding Dividend Aristocrats

Just 68 companies comprise the Dividend Aristocrats in 2024, and you may not be familiar with many of them, despite their history of attractive payouts.

Here are the top 20 by their dividend yield (data as of April 2024):

While some investors shoot for the highest current yield on their dividend stocks, others look for those that can grow their payouts over time. Those latter stocks may have smaller current yields, but they can boost their dividend over time, sometimes 9 or 10 percent over long periods.

How to invest in dividend stocks

If you’re interested in being a dividend investor, you have two big options for doing so: pick and choose individual stocks yourself or buy a fund of dividend stocks.

If you’re investing in individual stocks, you’ll need to do a lot of work to understand the industry, the company’s competitive advantage and the financials, among many other things. Investing in individual stocks goes well beyond just figuring out the dividend yield and buying the stock.

Most companies pay dividends quarterly. The firm’s board of directors formally announces the dividend and pay date each quarter through a press release or a filing with the Securities and Exchange Commission (SEC). The money is then sent directly to your brokerage account.

If you’re investing in individual stocks, you’ll want to be aware of some key dates:

• Record date: Investors who are recorded as shareholders as of this day will receive the dividend payment.
• Ex-dividend date: Starting this day, shareholders who purchase the stock will no longer receive the next dividend payment.
• Payment date: On this day, investors will receive the dividend payment.

On the ex-dividend day, before the stock even trades, its price is adjusted downward by the amount of the dividend, and then days or sometimes weeks later on the payment date, the dividend will appear in your account.

If you’re looking to invest in Dividend Aristocrats through a fund, fund manager Pro Shares has an ETF especially for that, the S&P 500 Dividend Aristocrats ETF (NOBL). Another option is the SPDR S&P Dividend ETF (SDY). Both funds pay dividends quarterly.

The big advantage of investing in a fund is that you can have a complete portfolio of dividend stocks from the beginning. You’ll enjoy diversification since you own a portfolio of stocks with every dollar you invest. This diversification means that no single stock will hurt your portfolio too badly, reducing your risk. And you won’t have to track and analyze every position, as you would with individual stocks, making it much easier to follow and a big boon for new investors.

What to watch out for when investing in dividend stocks

If you’re investing in individual dividend stocks, you’ll want to pay particular attention to a few things:

• Taxes: Any dividends you receive are taxable unless they’re inside a tax-advantaged account such as an IRA or 401(k). And that’s true even if you reinvest your payouts into more shares of the stock or fund. Qualified dividends are taxed at the more favorable capital gains rates, as compared to the ordinary income tax rates.
• Payout ratio: The payout ratio is the percentage of the company’s profits that are paid out as dividends. The higher the ratio, the more precarious the dividend. If a company pays out 80 percent of its earnings, then a small dip in its fortunes, maybe during a recession, could force the company to cut its dividend. Watch this figure closely. On the other hand, a low ratio allows a company to increase its payout even faster than its earnings growth.
• Eroding competitive position: Dividend-paying companies tend to be slow-growth, often with few places to invest their excess cash flow. But for others, the core business may actually be shrinking or the company may not be reinvesting in its business, meaning that it’s slowly losing its competitive position in the industry. So while the dividend looks good today, it may end up being cut tomorrow as profitability falls.

Those are just a few key issues with dividend stocks, and you’ll want to look closely at other aspects of the individual business. These areas of concern (the tax issues, excepted) are mostly moot for investors in a dividend stock fund because it’s composed of many companies.

Bottom line

If you’re looking for dividend stocks with a strong track record, it’s hard to do better than the Dividend Aristocrats. These stocks can be a great place to start your research on attractive dividend-paying companies, but you still need to carefully analyze each company. If you’d like the simple but still lucrative option, check out funds that invest in these dividend stalwarts.