In this article, we’ll introduce you to the world of dividend aristocrats – what they are, the requirements to become one, the compelling reasons to invest in them, their significant advantages, various forms of investment, and the best investment vehicles. So, what exactly are dividend aristocrats?
What are the dividend aristocrats?
To begin, it’s essential to understand that companies are not obligated to distribute dividends to their shareholders. However, if they choose to do so, it doesn’t have to be a regular or continuous process. Regardless, the decision to pay dividends must be approved beforehand.
Dividend aristocrats are companies that have consistently paid and increased their dividends each year for more than 25 years without interruption.
To be officially considered a dividend aristocrat, a company must meet four specific requirements:
- They must have a track record of paying and raising their dividend for at least 25 consecutive years.
- Be a part of the S&P 500 index.
Some people may apply additional criteria, such as having a market cap in excess of $3 billion.
Several interesting indices are related to dividend aristocrats, but the primary one is the S&P 500 Dividend Aristocrats, established by Standard and Poor’s. Notably, it has outperformed the regular S&P 500 during challenging market conditions. Over the last decade, it has displayed superior performance and lower volatility, making it an appealing investment option.
Other indices for dividend aristocrats include:
- S&P Europe 350 Dividend Aristocrats: composed of companies that have been increasing their dividends for at least 10 years. A large portion of the index composition consists of UK companies.
- S&P Euro High Yield Dividend Aristocrats (highest dividend-yielding Eurozone companies within the S&P Europe BMI)
- S&P UK High Yield Dividend Aristocrats (highest dividend-yielding UK companies included in the S&P United Kingdom BMI)
The S&P 500 ESG Dividend Aristocrats was created recently, too, and its largest 10 holdings are:
|Companies||Ticker||First dividend payment|
|Illinois Tool Works||ITW||1933|
All these companies that meet the ESG criteria aim to promote sustainable investment in social, economic and environmental issues.
Why invest in dividend aristocrats?
Investing in dividends offers a straightforward path to earn additional returns, provided that the performance and growth of the companies listed on the Stock Exchange are sound. After all, receiving dividends won’t be beneficial if the stock prices simultaneously plummet.
There are specific scenarios where investing in dividends becomes even more advantageous than other investment options, such as during periods of elevated inflation. When inflation exerts pressure and diminishes the purchasing power of families, dividends can act as a shield against the eroding effects of rising prices. This is because, in times of inflation, dividend payments tend to increase.
Historical data strongly supports the significance of investing in dividends during times of inflation. Over the span from the year 2000 to 2021, dividends from companies in the S&P 500 reached an impressive sum of 140,110 million dollars, reflecting a compelling compound annual growth rate of nearly 6.5%.
Moreover, the historical returns of dividend aristocrat stocks have consistently outperformed the overall market’s returns.
By implementing a well-thought-out asset allocation strategy, focusing on companies that distribute sustainable and growing dividends, investors expose themselves to high-quality assets while gaining enhanced protection against market volatility. This advantage holds true even during periods of inflation and fluctuating interest rates.
How to invest in dividend aristocrat stocks?
While investing in dividends by purchasing individual stocks with promising dividend yields is one approach, it comes with certain drawbacks. One major challenge is the significant time and effort required to navigate the vast universe of stocks, identify those with notable dividends, conduct research, apply filters, monitor them consistently, and make adjustments to the portfolio.
Additionally, the costs incurred through broker commissions with each stock transaction can add up considerably, unless you opt for commission-free brokers.
Top 10 dividend aristocrats
As of this writing, the S&P Dividend Aristocrats index comprises a total of 64 companies.
Outlined in the table below are the 10 key companies with the highest weighting in the index:
do they pay dividends?
|Air Products & Chemicals||APD||1940|
|T Rowe Price||TROW||1937|
What companies usually become dividend aristocrats?
Dividend aristocrats are usually well-established and mature companies with limited growth prospects. Their primary goal is to attract and retain their existing shareholders.
To maintain a consistent dividend payment over time, these companies must have stable, solid, and recurring business operations. This stability ensures they can continue to distribute dividends even during turbulent economic times or periods of uncertainty.
How to invest in dividend aristocrats through ETFs?
The most convenient, cost-effective, and efficient way to invest in dividend aristocrats is through specialised investment vehicles like funds and ETFs (Exchange-Traded Funds).
ETFs represent a popular and accessible way to invest in dividend aristocrats, allowing investors to gain exposure to a diversified portfolio of these reliable dividend-paying companies. They offer simplicity, and liquidity, and are managed by professionals, making them an attractive option for both individual and institutional investors alike.
- SPDR S&P U.S. Dividend Aristocrats UCITS: pays dividends quarterly and follows the S&P High Yield Dividend Aristocrats index.
- SPDR S&P Euro Dividend Aristocrats UCITS: pays dividends semi-annually and follows the S&P Euro High Yield Dividend Aristocrats index.
- SPDR S&P UK Dividend Aristocrats UCITS: pays dividends semi-annually and follows the S&P UK High Yield Dividend Aristocrats index.
- SPDR S&P Pan Asia Dividend Aristocrats UCITS ETF: pays dividends semi-annually and follows the S&P Pan Asia Dividend Aristocrats index. It mainly invests in Japan, China, Australia and Hong Kong.
- SPDR S&P Global Dividend Aristocrats UCITS ETF: pays dividends quarterly and follows the S&P Global Dividend Aristocrats Quality Income index. It mainly invests in the United States, Canada, Japan, Switzerland and the United Kingdom.
Here are the ETFs in a table format:
|SPDR S&P U.S. Dividend Aristocrats UCITS||SPYD||IE00B6YX5D40|
|SPDR S&P Euro Dividend Aristocrats UCITS||SPYW||IE00B5M1WJ87|
|SPDR S&P UK Dividend Aristocrats UCITS||SPYG||IE00B6S2Z822|
|SPDR S&P Pan Asia Dividend Aristocrats UCITS ETF||ZPRA||IE00B9KNR336|
|SPDR S&P Global Dividend Aristocrats UCITS ETF||ZPRG||IE00B9CQXS71|
Learn more about dividend investing
- Beginner’s guide to dividends
- Dividend investing
- Best dividend stocks
- Top dividend kings
- Best commission-free brokers to invest in stocks and ETFs
- Best ETF brokers
Dividend aristocrats: summary
In conclusion, dividend aristocrats offer a compelling investment opportunity for those seeking consistent returns and stability in their portfolios. These prestigious companies, listed on the S&P 500 and with a track record of raising dividends for over 25 consecutive years, represent the epitome of reliability and resilience in the market.
What are the benefits of investing in dividend aristocrats compared to other investment options?
There are many benefits. For example, dividend aristocrats are well-established and mature companies with a proven track record of consistently paying and increasing dividends for over 25 years. This stability provides a reliable income stream for investors, especially during uncertain economic times.
How can I determine if a company is a dividend aristocrat?
To identify a dividend aristocrat, look for companies listed on the S&P 500 index that have increased their dividend payouts for at least 25 consecutive years.
Are dividend aristocrats suitable for income-focused investors?
Yes, dividend aristocrats are highly suitable for income-focused investors. These companies are renowned for their commitment to consistently paying dividends, making them an attractive choice for those seeking reliable income streams.