What are Dividend Aristocrats and Should You Own Them?

What are Dividend Aristocrats and Should You Own Them?

The following guest post was contributed to My Own Advisor by Sure Dividend.

The coronavirus crisis has caused a great deal of economic uncertainty.

We’re not nearly out of the woods yet.

While the market has performed well in recent weeks, leaving the S&P 500 Index down less than it was a few weeks ago, no one could blame investors for being hesitant about buying stocks right now. 

In times of uncertainty, we believe investors should keep a long-term view, and ignore the short-term noise.

Then again, as Mark continually writes about on his site maybe you don’t need any more money advice!

Why you may not need any more money advice

At Sure Dividend we’re fans of high-quality dividend growth stocks for long-term investing success.

Specifically, we favour the Dividend Aristocrats, at the time of this post a group of 66 stocks in the S&P 500 Index with 25+ consecutive years of annual dividend increases.

Investors looking for dividend growth stocks to buy and hold for the long-term should consider this list to build a portfolio around.

Dividend Aristocrats Overview

The Dividend Aristocrats list is compiled by Standard & Poor’s. It currently contains 66 companies, spread across every market sector. The list is however heavily skewed towards consumer staples and industrials, with these two sectors making up over 40% of the Dividend Aristocrats. On the other hand, the information technology and communications services sectors are relatively under-represented, coming in at less than 2% of the Dividend Aristocrats list each.

To qualify as a U.S. Dividend Aristocrat, a company must be included in the S&P 500 Index, and have raised its annual dividends paid to shareholders for at least the past 25 consecutive years. Constituents must also have a float-adjusted market capitalization of at least $3 billion, and have sufficient liquidity with an average daily value traded of at least $5 million.

In order to become a Dividend Aristocrat, a company must have staying power. This means that it has the industry-leading brands and durable competitive advantages to generate long-term growth. These companies are rare; many companies either succumb to recessions or competitive threats. First, companies must have the ability to survive recessions. For this reason, highly cyclical businesses rarely make it onto lists such as the Dividend Aristocrats.

In addition, to remain an industry leader and continue to grow over so many years, that also requires a company has what Warren Buffett has described as a wide economic moat. This refers to a company with strong brands and an efficient business model that can survive new competitors in the marketplace.

Why Invest In Dividend Aristocrats?

Of the 505 stocks in the S&P 500 Index as of March 31st, as mentioned above just 66 of them—just 13% of the broader index—qualify as Dividend Aristocrats.

The Dividend Aristocrats as a group have outperformed the broader index for many years.

According to Standard & Poor’s, the Dividend Aristocrats generated total annual returns of 10.1%, versus 9.8% annualized returns for the S&P 500 Index. You can see the source for this here.

The Dividend Aristocrats actually outperformed the S&P 500 Index over the past 10 years, during a massive bull market. Investors might naturally assume that steady blue-chip dividend stocks like the Dividend Aristocrats would lag the broader index in a bull market, but this was not the case. Therefore, the Dividend Aristocrats provide investors with the best of all worlds:

  1. Rising dividends over time – a buffer against falling stock prices when they occur, and
  2. Compelling capital gains (in addition to their rising dividends) during a bull market.

Three Great Dividend Aristocrats for Long-Term Investors

You now know that we believe investors interested in buying individual stocks should consider the Dividend Aristocrats as part of their core portfolio.

Of course, there are unique risk factors associated with buying individual stocks. Single-stock risk means that investors should be diversified across market sectors.

How many stocks are enough?

Similar to Mark’s thoughts on this, while there is no right answer when it comes to stock diversification, we believe at least 15-20 stocks (from different market sectors) could be an adequate number of holdings.

One way to instantly gain diversification is to invest in an Exchange Traded Fund (ETF).

Mark has shared his comprehensive list of top dividend ETFs from the U.S. and Canada to earn cash for life.

Top dividend ETFs – get cash for life

We consider the ProShares S&P 500 Dividend Aristocrats ETF (NOBL) from his list to be the best dividend ETF, because it provides investors with diversification benefits of an ETF while remaining focused on the Dividend Aristocrats.

With all this in mind, everyone knows about the common Dividend Aristocrat stocks to buy and hold. Everyone writes about Johnson & Johnson, Procter & Gamble and Coca-Cola to own.

We believe the following three other Dividend Aristocrats represent buying opportunities for long-term investors.

General Dynamics (GD) is an aerospace & defense company that operates five business segments: Aerospace (23% of sales), Combat Systems (17%), Marine Systems (23%), Information Technology (23%), and Mission Systems (13%). The company’s Aerospace segment is focused on business jets and services while the remainder of the company is focused on defense. General Dynamics generates annual revenue of nearly $40 billion.

In 2019, company-wide revenue grew 8.7% while diluted adjusted earnings per share grew 7.2% to $11.98. After several quarters of decline, the company-wide backlog grew to $86,945 M and the book-to-bill ratio is now a healthy 1.5-to-1.0. Growth was driven by a $22.2 billion contract award for Virginia Block V submarines, aerospace orders, and IT contract wins.

General Dynamics has increased its dividend for 28 consecutive years, due to its entrenched industry position as a top military contractor. The stock has a dividend yield of about 3.3%.

Sysco Corporation (SYY) is the largest wholesale food distributor in the United States. The company serves 600,000 locations with food delivery, including restaurants, hospitals, schools, hotels, and other facilities. According to estimates, the company has a 16% market share of total food delivery within the United States.

On February 3rd, 2020, Sysco reported second-quarter results. Sales increased by 1.8% to $15 billion, gross profit increased by 2% to $2.8 billion, and gross margin increased by 5 basis points. Operating income grew by 22% to $552 million, while adjusted operating income increased by 3.9% to 626.9 million. Adjusted earnings-per-share increased by 13% for the quarter. Sysco has increased its dividend for over 50 consecutive years. The stock has a yield of about 3.3%.

Medtronic plc (MDT) is the largest manufacturer of biomedical devices and implantable technologies in the world. The company serves physicians, hospitals and patients in more than 150 countries and has over 90,000 employees. Medtronic generates $30 billion in annual revenue and $7 billion in annual profits.

On February 18th, 2020 Medtronic reported Q3 fiscal year 2020 results. For the quarter, Medtronic reported sales of $7.72 billion, representing organic (currency-neutral) growth of 2.6% from the same quarter last year. The Cardiac and Vascular Group, MITG and Restorative Therapies segments posted gains of 1.2%, 2.4% and 4.2% respectively, while the Diabetes Group was flat. On an adjusted basis, earnings-per-share increased 11.6% for the quarter.

Medtronic has increased its dividend for 42 consecutive years. Over those 42 years, the company has increased its dividend at an average rate of 17% compounded annually. The current dividend payout of $2.16 per share represents a 2.2% yield.

(Disclosure: My Own Advisor owns MDT from the list of three stocks mentioned above).

Summary

Owning dividend paying stocks does come with some investment risk.

That said, as Mark might also appreciate, we believe buying and holding U.S. Dividend Aristocrat stocks for the long-run can make you a successful investor for the increasing income they provide and capital gains they should also deliver.

Sure Dividend is a big fan of Mark’s journey to financial independence. You can follow our stock updates on Dividend Aristocrats and many more stocks here.

Thoughts on buying and holding U.S. Dividend Aristocrats for growing income and capital gains with time? Do you own any? Prefer to own ETF NOBL instead to avoid individual stock risk? Share in a comment!

My name is Mark Seed and I'm the founder, editor and owner of My Own Advisor. As my own DIY financial advisor, we're inching closer to our ultimate goal - owning a 7-figure investment portfolio for semi-retirement. We're almost there! Subscribe and join the journey. Learn how I'm getting there and how you can get there too!

10 Responses to "What are Dividend Aristocrats and Should You Own Them?"

  1. Some US stocks should definitely be considered for ones RRSP, provided you can get them at a reasonable price and the exchange rate is also reasonable.
    As for the Dividend Aristocrats, like all investment decisions, one should never accept blanket recommendations. Not all 66 dividend aristocrats are of equal quality, in fact, when I apply my simple four-rule test I eliminated 45% of the stocks. Take the time to review each before deciding to buy.

    Reply
    1. Yes, not all stocks are created equal Henry.

      Your rules about dividend cuts; paid a long-standing dividend; consistent records of increasing dividends for your X years are very important factors.

      Mark

      Reply
    2. cannew,
      I believe there are now 60 constituents on the US Dividend Aristocrats. Was your four-rule test possibly done on last years members?

      Have you applied your four-rule test on the Canadian Dividend All-Star List constituents? There were 98 companies on the Apr 30th list.

      Reply
      1. @Bernie: Number changes periodically, but my point is that I think one would do better evaluating each, and select the ones you like, rather than just buy all or an ETF.

        Reply
  2. I personally believe that US stocks are way too expensive, both due to the unreasonable run-up in prices over the past years and also the current very high cost of US dollars.
    I am considering selling some of my US stocks, non registered account, but am so indecisive….one of my holdings is at 10x the price I paid, unbelievable. Should I stay or should I go, lol?
    I personally (although this also includes many others) absolutely hate Medtronic as a company, so would never buy their stock; selling to institutions they may not have to worry about this, but some of their divisions sell direct to consumers.

    Reply
    1. Interesting Barbara. I’ve been overweight in Canada since I started my DG investing journey so I’ve been trying to buy U.S. stocks and assets for the last 10 years. I now own 11 U.S. stocks and DRIP almost every one of them except a couple. MDT being one of them.

      I hope to buy more U.S. stocks this year but the ones I want do seem expensive!! (MSFT).

      Don’t like MDT eh? I like their proven dividend history and their role in healthcare.

      Mark

      Reply
  3. Hey Mark and SD,

    I remember when I was getting started and first learned about the Dividend Aristocrats. It was such a nice help to have this shortlist which already culled out so much of the chaff in the markets. The companies on the list had demonstrated two things clearly:
    1) They make products that people buy through up-and-down cycles.
    2) They care about rewarding their shareholders with a growing source of income, usually outpacing inflation consistently.

    While it’s far from the only place I invest, that list is one I think about often and go back to from time to time to review the changes. As noted, tech companies don’t tend to make their way onto this list, but we may find that changing in the not-so-distant future as the digital age progresses.

    Take care,
    Ryan

    Reply
    1. Interesting call about tech and other companies. I was hoping to buy into some more MSFT but it seems very expensive. Maybe in 10 years or more from now it will seem cheap?? 🙂

      Mark

      Reply

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