Dividend Aristocrats: What Are They?

Dividends can be a bit of a polarizing subject in investing circles. Some investors swear by them because they provide constant cash flow to your portfolio. Others aren’t interested because the companies are generally considered to be value stocks with minimal future growth. As with most things in investing, it likely comes down to your personal risk tolerance and investment horizon. If you’re closer to retirement, stability and cash flow are likely more important. But if you’re a younger investor, you’ll likely prefer a higher growth opportunity with a riskier profile. But what are dividend aristocrats?

What Are Dividend Aristocrats?

Dividend Aristocrats

But while hundreds of companies pay out a regular dividend, there are a select few who have taken that to another level.

There is a group of 66 companies, all components of the S&P 500, that we call dividend aristocrats.

These stocks are as steady as any blue-chip stock on the market. One look at the list of names and you’ll understand why they’re known as aristocrats.

Most of these stocks are foundational companies for the American economy.

Generally speaking, dividend aristocrats are considered some of the best and strongest companies in the world. 

What Does it Take to be a Dividend Aristocrat?

Dividend aristocrat stocks are usually blue-chip stocks in value sectors such as financial, retail, or consumer goods. You won’t see many tech companies on this list, although give it a few more years and you just might! So what does it take to be a dividend aristocrat? There are three specific rules the stock must follow to be considered a part of this exclusive group.

Component of the S&P 500

Dividend Aristocrats

I already stated that each of the 66 dividend aristocrat stocks are components of the benchmark S&P 500 index.

Well, that’s because to be a dividend aristocrat stock you have to be a part of the S&P 500.

Why is this necessary to be considered a dividend aristocrat? It’s unclear, but likely just the status of the company to be included in the benchmark index. Either way, it doesn’t really have any effect on the stock, but being a part of the S&P 500 does add an additional level of stability. 

Increase Its dividend For 25 Years

This is the main characteristic that most investors know. Dividend aristocrat companies increase their quarterly dividend every year for 25 or more consecutive years.

It doesn’t have to be by much, and a lot of companies only do incremental raises by a penny or even half a penny. The amount the company raises the dividend is usually tied to its recent quarter.

Things like free cash flow and profit levels generally have an effect on how much a company will raise its dividend. 

Meet Minimum Size and Liquidity

This is more or less a foregone conclusion for most of these companies. Today, in the age of mega-cap companies, this is less important than it was several decades ago.

Still, if a company wants to be considered a dividend aristocrat, it needs to have a market capitalization of more than $3 billion. In today’s figures, $3 billion barely even registers on the scale of company sizes, but either way, it is a requirement.

Can A Stock Stop Being a Dividend Aristocrat?

Dividend Aristocrats

Of course! If any of the above three characteristics are changed, then a stock will immediately cease being a dividend aristocrat.

While most of these companies won’t fall below a $3 billion market cap or be removed from the S&P 500, it’s usually a failure to raise a dividend that would remove them from the list.

Recently, the communications giant AT&T (NYSE:T) was notably removed from the list of dividend aristocrats. The company failed to raise its dividend in 2021, after struggling through the pandemic. The stock still has a very respectable 8.65% dividend yield, but unfortunately it’ll need to wait another 25 years before it can be considered a dividend aristocrat once again. 

What Are The Dividend Aristocrat Stocks?

I am definitely not going to write about 66 different stocks here, so I’ll choose five stocks from the list. These five stocks have recognizable, global brands, and are some of the strongest long-term stocks to own. 

Coca Cola (NYSE: KO)

Coke

Some call Coca Cola the best dividend stock you can own in your portfolio. You know who might agree with that statement? Warren Buffett.

The Oracle of Omaha’s company Berkshire Hathaway owns about $24 billion worth of Coca Cola stock.

This makes up about 7% of its total portfolio. With a 2.8% dividend yield, Berkshire Hathaway makes about $672 million in annual dividends from just holding the stock. Coca Cola is a component of the Dow Jones Industrial Average, as well as the S&P 100. The company has raised its quarterly dividend for a staggering 60 consecutive years. 

WalMart (NYSE: WMT)

To nobody’s surprise, WalMart has the cash flow to be a dividend aristocrat. The big blue retailer has raised its stock each year for the past 49 years, and currently pays a 1.64% dividend yield.

WalMart is a foundational piece of the global retail industry, and has recently taken steps to improve its digital presence. WalMart currently operates nearly 12,000 retail locations around the world. They’re one of the most powerful brands. Don’t be surprised at all when WalMart raises its dividend next year to hit 50 consecutive years of raises.

Johnson & Johnson (NYSE: JNJ)

Johnson and Johnson

Johnson & Johnson is as important a company as any in the US economy. It’s a prominent healthcare conglomerate that operates both in clinical labs as well as sticking retail shelves full of its products.

Johnson & Johnson has been in business for more than 130 years, and has raised its dividend for the past 59 years. Currently, Johnson & Johnson pays out a 2.56% dividend yield, which places it well above the average S&P 500 yield.

McDonald’s (NYSE: MCD)

Not only does McDonald’s sell millions of cheeseburgers every year, but it’s also committed to raising its dividend. McDonald’s has done so in each of the past 46 years, ever since it paid its first dividend in 1976.

The stock has been a steady performer over the years as the company has had to change to keep up with the times. It’s menu is now diverse and trying to be healthier.

The dividend yield currently sits at 2.18%, which is still higher than the S&P 500 average yield rate. McDonalds continues to have one of the strongest global brands, and is instantly recognizable in any country around the world.

Realty Income (NYSE: O)

I wanted to add in a different type of dividend aristocrat with this stock. Realty Income is a REIT or Real Estate Investment Trust. The stock pays its dividends on a monthly basis and is mostly drawn from rent it collects on real estate.

Despite the monthly dividend, the stock pays an impressive 4.42% dividend yield. Realty Income is one of three real estate stocks amongst the dividend aristocrat list. This REIT has long been a favorite of dividend investors everywhere. 

Is There Anything Higher Than Dividend Aristocrats?

Dividend Aristocrats

Absolutely! When a company raises its dividend for more than 50 consecutive years, it becomes dividend stock royalty. At this point, it reaches the nobility known as the dividend kings.

Surprisingly, there are still 38 companies that qualify for dividend king status. Fifty consecutive years is a long time.

Consider that in the past 50 years we’ve had several market crashes including the dot com bubble, the coronavirus crash, and Black Monday in 1987. These are on top of numerous pullbacks that aren’t considered crashes. 

Dividend king stocks are the cream of the crop and should really be considered for your portfolio. Some of these stocks include Coca Cola, Johnson & Johnson, Procter and Gamble, 3M, Lowe’s, Altria Group, and Colgate Palmolive.

As you can see, these stocks are as blue-chip as you can get. Of the dividend king group, nine different companies have raised their dividend for more than 60 consecutive years!

Conclusion on Dividend Aristocrats

Whether you like investing in dividend stocks or not, being a dividend aristocrat is an impressive feat. The company needs to be a steady business, and be able to withstand dips in the economy.

Dividend aristocrats are companies with high cash flow and with high profitability from their products or services. While you need three specific requirements to be a dividend aristocrat, the only crucial one is that you raise your dividend each year for at least 25 consecutive years.

Once the company hits 50 straight years, it is a dividend king. There’s no diversified portfolio that does not have a place for any of the dividend aristocrats. 

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