What Are Dividend Aristocrats?

Investing in dividend-paying stocks can be a strategic move for generating income from your portfolio. A dividend represents a percentage of company profits that are paid out to shareholders. Dividend aristocrats represent S&P 500 companies that have a track record of raising their dividend payouts annually for at least 25 consecutive years. As a result, dividend aristocrats can be some of the most attractive investment options for income-seeking investors. For hands-on guidance about whether dividend aristocrats fit into your investing strategy, consider enlisting the services of a financial advisor.

As mentioned, the dividend aristocrats are a small group of dividend-paying stocks that have historically raised their dividend payout year to year. Specifically, the dividend payout has to have increased for at least 25 consecutive years to be considered for inclusion. Whether it makes sense to add these stocks to your portfolio can depend on your individual investment goals, the timeline for investing and your risk tolerance.

The dividend aristocrats include stocks from the S&P 500 Index, which tracks the movements of the 500 largest publicly traded U.S. companies. The list of companies that makes the cut for inclusion is updated annually and it can vary based on what happens with a particular stock’s dividend payout.

Generally speaking, the dividend aristocrats have established companies that have larger market capitalizations. Market capitalization represents a measure of a company’s value, as determined by multiplying its current share price by the total number of shares outstanding. Examples of companies that made the list of dividend aristocrats as of early 2021 include Johnson & Johnson (JNJ), Coca-Cola (KO) and Walmart (WMT).

How Are Dividend Aristocrats Determined?

While there are plenty of stocks that pay dividends to investors, only a handful can be counted as true Dividend Aristocrats. In order to do so, there are certain criteria that have to be met. Companies must:

Be part of the S&P 500
Post 25+ consecutive years of increasing dividend payouts
Meet minimum market capitalization and liquidity requirements

As a result, there are generally fewer than 100 companies that meet the definition of Dividend Aristocrats. For the past several years, the number of companies included on the list has hovered in the mid-60s.

Those companies, while representing different market sectors, tend to have some things in common. Aside from consistently increasing dividend payments to investors, they typically have years of growth under their belts. They’re larger companies that are unlikely to be bought out or taken over by another company. And they’re often more recession-proof than other companies when it comes to generating consistent profits.

Examples of Dividend Aristocrats

Analysts can analyze stocks in a number of ways to find dividend aristocrats. Some of these methods include the growth of stocks during a market downturn, or bear market, and the total growth of the stock price over a long period of time. When dividend-paying stocks are paying more money out over time then they can be considered an aristocrat. Here are a few examples of well-known dividend-paying stocks that fit this mold:

3M
Caterpillar
AT&T
Exxon Mobil
IBM

This list is not completely inclusive of all the most popular aristocrats but you can check these examples out in terms of market performance to compare others.

Should You Invest in Dividend Aristocrats?

Dividend-paying stocks can be a complement to any portfolio in which one of the goals is producing income. Depending on where you are in your journey to retirement, you might choose to reinvest dividends into additional shares of stock to grow your portfolio and have a bigger income stream later or draw on dividends for income now. Creating passive income is appealing, though there are some potential drawbacks to dividend investing.

For one thing, you have to consider the tax implications since dividends are subject to double taxation. Dividends are taxed before they’re paid out to you and you then have to pay taxes on them yourself. Additionally, dividends aren’t guaranteed. If a company posts poor earnings, for example, that could result in dividend payouts being reduced.

In terms of whether the dividend aristocrats, in particular, are good investments, there are some things that work in their favor. First, these companies have already proven that they’re capable of increasing dividend payouts consistently over time. So it’s less likely that you may see your dividend payouts decrease when investing in one of these companies.

Beyond that, companies included in the dividend aristocrats list tend to have strong fundamentals. They may be established leaders in their particular industries, carry low levels of debt and generate increasing profits year to year. That’s reassuring if you’re looking for stable companies to invest in that can weather different levels of market volatility.

You may also experience better returns from dividend aristocrats compared to other dividend-paying stocks. Again, that’s largely owing to the fact that these companies are typically larger, more established players. Of course, it’s important to keep in mind that if you’re not solely focused on dividends, you might see better returns by focusing on blue-chip growth stocks instead.

How to Invest in Dividend Aristocrats

If you’re interested in adding one or more of the dividend aristocrats to your portfolio, there are two ways you can approach it.

First, you can purchase shares of stock in individual companies from the list. When determining which stocks to buy, it’s important to do some basic research to see how they compare. While all of the Dividend Aristocrats increase dividends year over year, they don’t all pay out the same amount or increase dividends at the same rate. For that reason, it’s helpful to take a closer look at each company’s dividend history.

It’s also important to consider which Dividend Aristocrats are the best fit based on your personal preferences. For example, if you’re focused on promoting ESG principles in your portfolio then you might want to avoid companies that aren’t committed to sustainability.

The other option for investing in Dividend Aristocrats is to purchase mutual funds, exchange-traded funds or index funds that include them. The upside here is that you can get diversified exposure to multiple Dividend Aristocrats in a single package.

When investing in Dividend Aristocrat funds, pay attention to the turnover ratio as well as the expense ratio. The turnover ratio can determine how many capital gains events are triggered within the fund each year. The expense ratio reflects your cost of owning the fund annually, expressed as a percentage of assets. Both are important to consider if you’re concerned about holding on to as much of your dividend income as possible.

The Bottom Line

Dividend Aristocrats set themselves apart from other dividend stocks with regard to how they pay out to their investors as well as their overall makeup. Investing in these companies is something you might consider if you’re income-focused, either for the short- or long-term. Taking time to compare them can help you decide which Dividend Aristocrats are best suited to your needs. Besides stocks, you can also invest in dividend-paying ETFs and mutual funds.

Tips for Investing

Consider talking with your financial advisor about the pros and cons of dividend investing. If you don’t have a financial advisor yet, finding one doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Dividend-paying securities are one part of a well-balanced portfolio. Using a free investment calculator can give you a quick read on whether your assortment of securities fits your goals, timeline and risk profile.
Dividend reinvestment plans (DRIPs) can make growing wealth with dividend stocks easier. These plans allow you to automatically reinvest any dividends you earn into additional shares of stock. If you don’t need dividend income right away, you might consider this option to increase your holdings in a particular stock.