Dividend aristocrats are a special category of dividend-paying stocks with a successful track record of increasing their payouts year after year. In this guide, we’ve explored what dividends aristocrats are and why they may be exactly what your portfolio needs.
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What Are Dividend Aristocrats?
Dividend aristocrats are some of the most stable dividend payers in the stock market. Because of their stable and rising payouts, they can form the basis for a lucrative income-paying portfolio. A company must meet the following criteria to be classified as a dividend aristocrat:
- Be part of the Standard & Poor’s 500 Index
- Have an average daily trading volume of at least $5 million
- Have a market capitalization of at least $3 billion
- Pay and raise its dividend every year for at least twenty-five years
As evident from this criteria, only some of the highest-performing, relatively large companies can make the cut for being an aristocrat. Some of the most well-known dividend-paying companies include 3M, Caterpillar, IBM, Exxon Mobil, and AT&T.
The average dividend aristocrat is a solid, cash-generating business with slow growth, which means that it has few places to reinvest its cash flow and can make large payouts to shareholders. Because of this, hyper-growth companies are unlikely to be part of the aristocrats–it is typically companies with resilient, stable business models and a consistent cash flow that constitute a large part of this group.
Dividend Aristocrats Versus Dividend Kings
As impressive as being an aristocrat sounds, some companies take it even further up a notch. The dividend kings are companies that have successfully increased their payouts for fifty years. To qualify as a dividend king, a company must meet only this hurdle; no other specific requirement is needed. Because it is much less common for companies to increase their payouts over half a century, the number of dividend kings is fewer than that of their aristocrat counterparts.
How to Invest in Dividend Aristocrats
If you’re interested in adding dividend aristocrats to your portfolio, there are two ways you can go about this. First, you can purchase shares of stock in individual companies from the list of dividend aristocrats. If you go down this route, look at each company’s dividend history to see how they compare–while all dividend aristocrats increase dividends year after year, they don’t pay the same amount or increase at the same rate.
You should also consider which aristocrat best fits your personal preferences. For instance, if you wish to promote ESG principles, avoid companies that are not particularly committed to sustainability.
Your second option is to purchase mutual funds, exchange-traded funds, or index funds that include them. This gives you diversified exposure to multiple dividend aristocrats in a single package.
What to Know About Investing in Dividend Stocks
If you’re interested in investing in individual dividend stocks, here are a few things you should remember:
Payout Ratio
The payout ratio is the percentage of the company’s profits paid out as dividends. If you’re an investor, watch this figure closely.
The higher the ratio, the more risky the dividend. If a company is paying out a high percentage of its earnings, even a slight dip in its fortunes could force it to cut its dividend. On the other hand, a low ratio will allow a company to increase its payouts even faster than its earning growth.
Taxes
Any dividends you receive are taxable unless held inside a tax-advantaged account, and this remains true even if you reinvest your payouts into more shares or stocks.
Competitive Position
It’s also important to consider the company’s competitive position in the market. Dividend-paying companies tend to grow slowly, often investing their excess cash flow only in a few places.
In some cases, if the core business is shrinking and failing to reinvest in its business, it could slowly be losing its competitive position in the industry. Before investing, it’s essential to consider the company’s current competitive position and potential for future growth.
Additional Tips
There are some issues with dividend stocks, and it’s always a good idea to look closely at other aspects of the individual business you’re investing in. If you’re unsure, we recommend consulting your financial advisor about the pros and cons of dividend investing.
You can also consider Dividend Reinvestment Plans (DRIPs) to make growing wealth with dividend stocks easier. These plans allow you to automatically reinvest any dividends you earn into additional shares of stock. This is a good way to increase your holdings in a particular stock and navigate some of the risks of dividend investing, as long as you don’t need dividend income right away.
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