All dividend investors should be familiar with the Dividend Aristocrats index. The Dividend Aristocrats index was founded in 1989 and has 51 constituents as of this writing. All members of the Dividend Aristocrats index have one thing in common: they have raised their dividends for 25 consecutive years without stopping.
Table of Contents
Why Dividend Aristocrats Matter To You
The idea behind Dividend Aristocrats is to highlight the most consistent companies in the S&P 500. Most dividend portfolios will be greatly rewarded in the long run by including such companies. While their yields are not stunning compared to some MLPs, it’s the growth that matters.
The growth is further amplified if you choose to reinvest your dividend income back into the stock. This will create a compounding effect that can greatly enhance your returns.
Dividend Aristocrat Growth
Consistent growth is the key to dividend investing, and the Dividend Aristocrat index hands the research to you on a silver platter. Companies that have increased their dividends for 25+ years have little to no interest in stopping that trend.
Many people will actually drop a stock from their dividend portfolio if they do come off the Dividend Aristocrats list because of this fact. Obviously, for a company to make such a decision, they must be facing tough times, or drastically new management.
The growth of these stocks means that your yield on cost will be higher, especially if you are reinvesting your dividends.
Dividend Aristocrats in Your Portfolio
Dividend Aristocrats provide consistency and dependability. This is nearly priceless in our current economic state. As of this writing, the Dividend Aristocrats index has returned 20.65% in the last year. How is that compared to the top CD rates of 1.1%?
Sure, stocks carry a higher risk, but giving up 19+% of income seems a lot riskier to me (especially considering qualified dividends!).
Dividend Aristocrats Risk
Of course, there is always a risk to investing, regardless of the index. The risk that you run with Dividend Aristocrats is that a company might over-extend itself to continue their dividend payments. This could result in the company eating away at their earnings.
If the company spends all of their earnings on dividends, then they won’t have enough money to reinvest in themselves. This could give an edge to competitors. There are a couple of ways to not be caught by surprise:
- Monitor the dividend payout ratio.
- Monitor the earnings per share.
- Monitor the EPS growth.
- Monitor the dividend growth rate.
These key ratios will help you decide if a company is over-extended already, or on course to be over extended.
More Dividend & Dividend Aristocrats Information
- S&P 500 Dividend Aristocrats Index
- Monthly Income Investments
- Dividend Stock Basics
- Dividend ETFs
- Dividend Yield Formula
- Canadian Dividend Stocks
This article is a part of our free Stocks that Pay Dividends Training Course. Check it out now!