Dividends can be a bit of a polarizing subject in investing circles. Some investors swear by them because they provide constant cash flow to your portfolio. Others aren’t interested because the companies are considered value stocks with minimal future growth. As with most investing, it likely comes down to your personal risk tolerance and investment horizon. Stability and cash flow are likely more important if you’re closer to retirement. But if you’re a younger investor, you’ll likely prefer a higher growth opportunity with a riskier profile. But what are dividend aristocrats?
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What Are Dividend Aristocrats?
But while hundreds of companies pay out a regular dividend, a select few have taken that to another level.
We call a group of 66 companies, all components of the S&P 500, dividend aristocrats.
These stocks are as steady as any blue-chip stock on the market. One look at the list of names, and you’ll understand why they’re known as aristocrats.
Most of these stocks are foundational companies for the American economy.
Generally speaking, dividend aristocrats are considered some of the best and strongest companies in the world.
Dividend Aristocrat Rules
Dividend aristocrat stocks are usually blue-chip stocks in value sectors such as financial, retail, or consumer goods. You won’t see many tech companies on this list, although give it a few more years, and you just might! So, what does it take to be a dividend aristocrat? The stock must follow three specific rules to be considered a part of this exclusive group.
Component of the S&P 500
I already stated that each of the 66 dividend aristocrat stocks is a benchmark S&P 500 index component.
Well, that’s because to be a dividend aristocrat stock, you must be a part of the S&P 500.
Why is it necessary to be considered a dividend aristocrat? It’s unclear, but likely just the company’s status to be included in the benchmark index. Either way, it doesn’t affect the stock, but being a part of the S&P 500 adds stability.
Increase Its dividend For 25 Years
This is the main characteristic that most investors know. Dividend aristocrat companies increase their quarterly dividend yearly for 25 or more consecutive years.
It doesn’t have to be by much; many companies only do incremental raises by a penny or even half a penny. The company raises the dividend amount, usually tied to its recent quarter.
Free cash flow and profit levels generally affect how much a company will raise its dividend.
This is more or less a foregone conclusion for most of these companies. Today, in the age of mega-cap companies, this is less important than it was several decades ago.
Still, if a company wants to be considered a dividend aristocrat, it must have a market capitalization of more than $3 billion. In today’s figures, $3 billion barely even registers on the scale of company sizes, but either way, it is a requirement.
Can a Stock Stop Being a Dividend Aristocrat?
Of course! If any of the above three characteristics are changed, a stock will immediately cease being a dividend aristocrat.
While most of these companies won’t fall below a $3 billion market cap or be removed from the S&P 500, it’s usually a failure to raise a dividend that would remove them from the list.
Recently, the communications giant AT&T (NYSE: T) was notably removed from the list of dividend aristocrats. After struggling through the pandemic, the company failed to raise its dividend in 2021. The stock still has a respectable 8.65% dividend yield, but unfortunately, it’ll need to wait another 25 years before it can be considered a dividend aristocrat again.
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Best Dividend Aristocrat Stocks
I will not write about 66 different stocks here, so I’ll choose five stocks from the list. These five stocks have recognizable global brands and are some of the strongest long-term stocks.
1. Coca Cola (NYSE: KO)
Some call Coca-Cola the best dividend stock in your portfolio. Do you know who might agree with that statement? Warren Buffett.
The Oracle of Omaha’s company Berkshire Hathaway owns about $24 billion worth of Coca-Cola stock.
This makes up about 7% of its total portfolio. With a 2.8% dividend yield, Berkshire Hathaway makes about $672 million in annual dividends from just holding the stock. Coca-Cola is a component of the Dow Jones Industrial Average and the S&P 100. The company has raised its quarterly dividend for a staggering 60 consecutive years.
2. WalMart (NYSE: WMT)
To nobody’s surprise, WalMart has the cash flow to be a dividend aristocrat. The big blue retailer has raised its stock yearly for the past 49 years and pays a 1.64% dividend yield.
Walmart is a foundational piece of the global retail industry and has recently taken steps to improve its digital presence. Walmart currently operates nearly 12,000 retail locations around the world. They’re one of the most powerful brands. Don’t be surprised when Walmart raises its dividend next year to hit 50 consecutive years of raises.
3. Johnson & Johnson (NYSE: JNJ)
Johnson & Johnson is as important a company as any in the US economy. It’s a prominent healthcare conglomerate that operates in clinical labs and sticking retail shelves full of its products.
Johnson & Johnson has been in business for over 130 years and has raised its dividend for 59 years. Johnson & Johnson pays out a 2.56% dividend yield, placing it well above the average S&P 500 yield.
4. McDonald’s (NYSE: MCD)
Not only does McDonald’s sell millions of cheeseburgers every year but it’s also committed to raising its dividend. McDonald’s has done so in each of the past 46 years, ever since it paid its first dividend in 1976.
The stock has been a steady performer over the years as the company has had to change to keep up with the times. Its menu is now diverse, and it is trying to be healthier.
The dividend yield currently sits at 2.18%, still higher than the S&P 500 average yield rate. Mcdonald’s continues to have one of the strongest global brands and is instantly recognizable in any country around the world.
5. Realty Income (NYSE: O)
I wanted to add a different type of dividend aristocrat with this stock. Realty Income is a REIT or Real Estate Investment Trust. The stock pays its monthly dividends and is mostly drawn from rent it collects on real estate.
Despite the monthly dividend, the stock pays an impressive 4.42% dividend yield. Realty Income is one of three real estate stocks on the dividend aristocrat list. This REIT has long been a favorite of dividend investors everywhere.
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Is There Anything Higher Than Dividend Aristocrats?
Absolutely! When a company raises its dividend for over 50 consecutive years, it becomes dividend stock royalty. At this point, it reaches the nobility known as the dividend kings.
Surprisingly, there are still 38 companies that qualify for dividend king status. Fifty consecutive years is a long time.
Consider that in the past 50 years, we’ve had several market crashes, including the dot com bubble, the coronavirus crash, and Black Monday in 1987. These are on top of numerous pullbacks that aren’t considered crashes.
Dividend king stocks are the cream of the crop and should be considered for your portfolio. These stocks include Coca-Cola, Johnson & Johnson, Procter and Gamble, 3M, Lowe’s, Altria Group, and Colgate Palmolive.
As you can see, these stocks are as blue-chip as you can get. Of the dividend king group, nine companies have raised their dividend for over 60 consecutive years!
Final Thoughts
Whether you like investing in dividend stocks or not, being a dividend aristocrat is an impressive feat. The company needs to be a steady business and withstand economic dips.
Dividend aristocrats are companies with high cash flow and high profitability from their products or services. While you need three specific requirements to be a dividend aristocrat, the only crucial one is raising your dividend each year for at least 25 consecutive years.
Once the company hits 50 straight years, it is a dividend king. There’s no diversified portfolio that does not have a place for any of the dividend aristocrats.
