What is a Dividend Aristocrat?

I like stocks with dividends. I know that I’m paying income tax on the dividends, but the tax rate on qualified dividends maxes out at 20%. I know this is double taxation, because the companies whose stock I own are paying taxes on their profits before I even get the tiny little portion of profits that becomes the dividend. But I still like dividends. I like to use the dividend proceeds to reinvest, which provides me an easy way to build up my portfolio. And I like the fact that the price of dividend-income producing stocks tends to be stable because lots of investors like regular income.

Because I like dividends, I like to read about dividend-producing stocks. There are any number of web sites that specialize in information on dividend-producing stocks like Dividend.com, and most larger investing sites like Seeking Alpha and Fool.com will include a lot of information (and even specialized news feeds) catering to dividend investors. In my reading I’ve seen lots of references to “Dividend Aristocrats”, which is the list of companies that have increased their dividend for the last 25 years.

The list changes from year to year as companies adjust their dividend according to their performance. In 2010, for example, the list of dividend aristocrats dropped from 52 to 42. But new companies are added to the list also. The 2015 list added 8 new companies, and only dropped 1 and the current list stands at 52 again. Some of these are household names like Clorox (CLX) and Coca-Cola (KO), but some are not. Investors can own stocks individual or through ETFs like the ProShares S&P 500 Aristocrats ETF (NOBL).

What makes owning dividend aristocrats appealing? Not only have they provided steady and increasing income, but that income represents performance over time. In order to pay dividends over time, these companies have to consistently generate cash in excess of what they need for operations. To be an aristocrat, they have to have done so for 25 years. Their returns have outperformed the S&P 500 as a whole, particularly as income investors have looked for alternatives to low bond yields.

The downside is that these companies have been attractive to investors for a long time, so the prices can be high and these are mature companies that may not see as much growth as younger companies that are still expanding. Also, prices may drop as interest rates rise, making bonds more attractive to income investors.

I own shares of dividend-producing stocks, and some are on the list of Aristocrats and some aren’t, and I think that’s a good thing. I think the list can be a starting point for looking for companies with solid fundamentals that can be long-term investments. I also think there are plenty of good companies, even good dividend-paying companies, that don’t meet the criteria of a Dividend Aristocrat.

References and Further Reading

12 highest-yielding ‘dividend aristocrat’ stocks and Being a dividend aristocrat beats being the S&P-from Market Watch.

2015 Dividend Aristocrats List-on Investor Junkie

Dividends: Advantages And Disadvantages-on Seeking Alpha

Time to ditch the ‘dividend aristocrats’, says Artemis star-from CityWire.UK

This article is for information purposes only and should not be constituted as advice. I am not a financial advisor, only an investor sharing my thoughts. Past performance does not determine future performance, and an investor interested in dividends and dividend-producing stocks should proceed with caution and do lots of research before putting their money in any investment.

Image courtesy of Stuart Miles at FreeDigitalPhotos.net

Leave a Reply

CommentLuv badge