A firm in the S&P 500 index is considered a dividend aristocrat if it continuously pays dividends to shareholders for at least 25 years and raises the amount of those payouts every year. Some fans of dividend aristocrats rank them based on further criteria including firm size and liquidity, for example, having a market capitalization over $3 billion.
How to understand better dividend aristocrats
High dividend yielding companies are relatively uncommon, and they typically have very solid businesses. They frequently produce recession-proof goods, enabling them to continue making profits and paying dividends even when other businesses struggle. At any given time, there are typically less than 100 dividend aristocrats. Only 65 dividend aristocrats were included in the Standard & Poor’s 500 in 2021. They can be found in a variety of industries, including construction, retail, oil & gas, and healthcare.
High-flying digital startups and established businesses hardly ever pay dividends. To maintain higher-than-average growth, their management teams choose to reinvest any earnings back into the business. Some young businesses even operate at a net loss and lack the funds necessary to pay dividends. Large, well-known businesses with steady profits are generally stronger dividend payers. Many people do not benefit from consistent, substantial growth or growing stock prices. These businesses typically distribute dividends on a regular basis as an alternative method of rewarding their shareholders.
The most prominent dividend aristocrats
Analysts evaluated dividend aristocrats in a variety of ways as investments. They include a company’s ability to weather market downturns, the increase of its stock price through time, and its hopes for future success. That implies that the dividend aristocrats follow a fluid hierarchy.
Forbes selected the top dividend aristocrats for 2021 based on the predicted total future returns of the companies. Keep in mind that all decisions, especially Exxon Mobil, were made before the crash in oil prices in 2021 caused by the new coronavirus’s spread. In 2021, 65 stocks satisfy the requirements to be classified as dividend aristocrats. Several instances include:
- AT&T (T)
- Exxon Mobil (XOM)
- Walgreens Boots Alliance (WBA)
- AbbVie (ABBV)
- IBM (IBM)
- 3M (MMM)
- Caterpillar (CAT)
What are the advantages and disadvantages of dividend aristocrats?
Investors seeking reliable income should look for a company that pays out an increasing dividend. Doing so is a sign that the business is financially secure. Keep in mind, though, that a dividend is a percentage of a company’s revenues that it pays to its shareholders in cash. Any funds which are distributed as a dividend are not reinvestment in the company.
A business may choose not to reinvest in the company if it pays shareholders an excessively high percentage of its income because there aren’t many prospects for the business to grow. As a result, a dividend aristocrat can be missing out on growth prospects or not have any at all to reinvest earnings.
Moreover, when the stock isn’t rising, management of the company can employ dividends to appease irate investors. However, it does entail some organic degree of development in order to sustain such payments if a dividend aristocrat is able to consistently increase the payout it pays to shareholders.
What about dividend kings?
“Dividend kings” are firms that have a reputation for paying dividends regularly throughout time, much as the dividend aristocrats. A company just needs to pass one requirement to become a dividend king: paying a rising dividend continuously for at least 50 years. Dividend aristocrats must be S&P 500 members and have increasing dividend payouts for at least 25 years.
Not all aristocrats will be dividend kings, and some dividend kings will also be dividend aristocrats (for instance, they have not been around for 50 years or are not in the S&P 500). Since it is less frequent for businesses to regularly raise their dividends for more than 50 years, there are often fewer dividend kings than their aristocrat counterparts.
How to identify other dividend payers?
Companies often have one of three types of dividend policies: a steady dividend policy, a constant dividend policy, or a residual dividend policy. Regardless of changes in the company’s earnings, a shareholder may count on a corporation with a consistent dividend policy to pay out consistent and predictable dividends every year.
If a corporation has a consistent dividend policy, it will annually distribute a portion of its profits to shareholders, exposing investors to the whole range of earnings fluctuations. If the corporation has a residual dividend policy, it distributes any remaining funds after paying for working capital and capital expenditures as dividends.
How can you create a portfolio of dividend aristocrats?
The S&P 500 includes all dividend aristocrat businesses, making it possible to discover those stocks and build a dividend-focused portfolio. There were 65 such stocks in 2021, and they may be located online by conducting a search as several financial websites keep current lists of the dividend aristocrats, such as those provided by Dogs of the Dow or Sure Dividend.
What percentage should your portfolio contain dividend aristocrats?
The importance of dividend stocks will vary depending on your risk appetite, time horizon, requirement for immediate cash flow, and tax situation, among other things. Dividend aristocrats can be less volatile but also have lower expected returns because they often are large, mature corporations with limited growth potential. The substantially decreased risk and added income that these equities offer may be especially advantageous to retirees.
