Are Dividend Aristocrat Stocks A Good Investment?

Overview

Dividend Aristocrats are stocks in the S&P 500 that have paid increasing dividends for at least 25 consecutive years. In addition to the 25 years of dividend increases, they must also have at least a $3 billion market cap and provide at least $5 million dollars in trading volume per day averaged over the trailing three-month period.

In this article, I will take a look at the Aristocrats in their totality via the ProShares S&P 500 Dividend Aristocrats ETF (BATS:NOBL) as well as breaking down the Dividend Aristocrats’ subsets to determine the best way to invest in this group of stocks.

How Are Dividend Aristocrats And Kings Different?

Dividend Aristocrats must have paid an increasing dividend for at least the last 25 years. Dividend kings must have paid an increasing dividend for at least 50 years.

Here is an exact definition of the two by Investopedia:

Similar to the dividend aristocrats, “dividend kings” are companies that are known for paying out dividends consistently over time. While a dividend aristocrat must be a member of the S&P 500 and have an increasing dividend payout over 25 years or more, to qualify as a dividend king a firm must only meet one hurdle: paying an increasing dividend consistently for at least 50 years. Source: Investopedia

Some of the Dividend Kings are not on the Aristocrat list because they don’t meet some of the additional criteria required by the Aristocrats such as being a member of the S&P 500 or having a minimum of $3 billion market cap. Examples of these would be Farmers & Merchants Bancorp (OTCQX:FMCB) which only has a market cap of $780 million and American States Water Co. (AWR) which is not in the S&P 500.

Are Dividend Aristocrat Stocks Safe?

Dividend Aristocrat stocks are generally very safe because they have been around for at least 25 years. They also tend to be in more stable industries with a long-time history of earnings, dividends, and revenue gains.

After all, a company that has paid an ever-increasing dividend for 25 years is most likely going to continue for 26, 27, and 28 years.

Think Coca-Cola (KO) Johnson & Johnson (JNJ) and 3M (MMM).

That does not mean that these stocks don’t have downturns, but generally speaking they are not as volatile as most stocks.

Here are the lists of the top-5 and bottom-5 members of the Aristocrats based on 5-year total returns.

Top 5:

The average return (including dividends) was 161% for the Top-5 performers.

On the other hand, the bottom-5 took a real beating, down an average of 41%.

Who would have guessed that 3M (MMM) and Walgreens (WBA) would be on the down list? If I could coin a new term for these bad performers it might be “Dogs of the Aristocrats”. Worth a look for the coming year perhaps.

So how did ProShares S&P 500 Dividend Aristocrats ETF (NOBL) do over the last year compared to the S&P 500 (SPY) and the more tech-oriented Invesco QQQ ETF (QQQ)?

Turns out it did pretty well outperforming both on a total return basis. This shows how during volatile market conditions like those that prevailed over the last year, a conservative, dividend-oriented ETF like NOBL can add stability to your overall portfolio.

What Are The Highest Paying Dividend Aristocrats?

It should come as no surprise that the 10 highest paying stocks in the list include four of the worst performing shares we showed in the previous paragraph: VF Corp., Walgreens, 3M, and Federal Realty.

Are Dividend Aristocrats Worth Investing In?

Dividend Aristocrats are generally safe, long-term dividend-paying stocks that should be in any conservative investor’s portfolio. Since balancing a portfolio of 65 stocks is more work than most investors want to do, the best way is to buy shares of the ProShares S&P 500 Dividend Aristocrats ETF (NOBL).

Since its inception in 2013, NOBL has returned more than 160%. Note on the chart the nice recovery from the COVID crisis of 2020.

Otherwise, you could use the list to search for candidates that meet other criteria that you have already established.

The bottom line is buying conservative stocks that have paid ever-increasing dividends for more than 25 years should be a part of every dividend investor’s portfolio.