Has it really been 25 years?

Let’s hop in the time machine and take a quick trip back to Y2K. If you’ll recall, Cast Away was playing in movie theatres and television viewers were glued to a new reality show called Survivor. Brittany Spears and Destiny’s Child ruled the radio. And in the sporting world, the United States took home 37 gold medals in the Sydney Summer Olympics.

This was the year that America Online acquired Time Warner for $162 billion, the largest corporate merger ever at the time. Nokia released the snazzy 3310, a miraculous mobile device with built-in calculator and text messaging functions. And who can forget the Presidential election that year, which took weeks to recount the Florida ballots.

It was a fantastic time for investors… until it wasn’t. The soaring Nasdaq closed above 5,000 for the first time in March, only for the bottom to fall out during the infamous dot-com crash.

The turn of the Millennium still feels like yesterday to me. But in the business world, a quarter-century is eons. Entire industries have risen and fallen. And the global markets have been tested by some severe economic shocks.

Dozens of prominent companies that were household names in 2000 are no longer with us today. Lehman Brothers, Worldcom, Blockbuster, and Toys ‘R’ Us, just to name a few.

But through it all, a handful of companies have prospered in both good times and bad, rewarding their shareholders at every turn. They managed to raise dividends in 2000, again during the financial crash of 2007, and during the 2020 pandemic lockdowns… and every other year along the way.

Of course, I’m talking about the Dividend Aristocrats. It takes 25 straight years of dividend hikes to join this elite club.

This is an exclusive society. Out of 6,000 publicly listed stocks trading on major U.S. exchanges, just 69 qualify for membership. One slip, and you’re out.

That’s what makes Dividend Aristocrats such a rare breed. All it takes is one bad year, and an otherwise solid business with maybe 15 or 16 straight increases under its belt must start back over at zero. Intel (NSDQ: INTC) cut its dividend last year, so the chipmaker won’t be eligible again until 2040 at the earliest.

It doesn’t even take a cut. Many companies opted to maintain their payouts last year, neither increasing nor decreasing. That’s not good enough. For an Aristocrat, those quarterly distributions must grow larger each and every year.

So who is in this special group?

Well, there are quite a few familiar names, such as McDonald’s (NYSE: MCD), Coca-Cola (NYSE: KO), Exxon Mobil (NYSE: XOM) and Wal-Mart (NYSE: WMT), all of which have 40+ consecutive years of rising dividends.

But some of these club members are largely unknown. Like A.O. Smith (NYSE: AOS), which makes water heaters for residential and commercial use. Or Becton, Dickinson & Company (NYSE: BDX), a top supplier of medical devices and laboratory instruments.

These aren’t exciting product lines – but boring can be good.

Aristocrats come from all corners of the market, selling everything from hamburgers to steel to missile defense systems. But all these outstanding businesses share one common trait: the fortitude to raise dividends year after year after year.

You won’t find any riff-raff in here. This is la-crème-de-la-crème of dividend society.

Even without combing through SEC filings, we instinctively know that an Aristocrat possesses each of these desirable characteristics.

A mature, proven business model
For every new business that succeeds, there are maybe a dozen that fail. Every Aristocrat has been tested in the arena of combat. Most are entrenched leaders in their fields with established national brands, efficient distribution systems and other protective economic moats that provide a competitive advantage, the key to maintaining superior long-term returns.

Surplus cash flow generation
There’s a well-known market axiom that “dividends don’t lie.”

Reported GAAP earnings can be bent, twisted, and manipulated. But you can’t fake cash distributions. Either the money is there or it isn’t. Since other operating needs (payroll, rent, interest, etc.) are always met first, the simple act of making voluntary dividend payments every 90 days tells us that there is a cash surplus to share.

Reaching Aristocrat status is the hallmark of a quality business that consistently generates more cash than it needs.

An expanding bottom line
Verizon (NYSE: VZ) paid out $2.69 per share in dividends last year. With 4.2 billion shares outstanding, that works out to a distribution of $11.2 billion. Raising the dividend by even a penny would require an additional outlay of $42 million per quarter.

That would be tough to manage if the earnings pool is shrinking. A struggling company might rely on external sources (such as borrowing) to make ends meet temporarily – but not for decades.

(Incidentally, Verizon has now raised dividends for 18 straight years and needs just seven more for induction).

An Aristocrat may go through the occasional slump. But they are usually short-lived. Common sense says that 25 straight years of rising dividends reflect an underlying business that has far more good years than bad.

Shareholder-friendly management
Having the ability to generously raise dividends is one thing – the willingness is something else entirely.

History is littered with companies that were run into the ground by ill-advised mergers, reckless spending, and other questionable decisions. Many didn’t pay a penny in dividends.

Aristocrats are run by skilled management teams that know how to balance the deployment of capital, investing what is needed to grow the business and returning the rest to stockholders.

It also goes without saying that once a company has qualified for Aristocracy, it wants to stay there. These impressive dividend track records are attractive selling points to the investment community. So companies with winning streaks on the line tend to avoid taking any unnecessary risks that might jeopardize their dividends.

Earnings Stability
Any company can raise dividends when the economy is red-hot. The true test is whether they have the financial strength to do so when conditions cool.

We’ve endured three prolonged recessions since 2000, and many other short (but harsh) economic slumps. By virtue of their membership, weatherproof Aristocrats have demonstrated an ability to not only withstand storms, but continue raising payouts without skipping a beat.

That doesn’t happen without products and services that are, to varying degrees, recession-resistant.

Keep in mind, even before that extra income hits your pocket, the dividend hike declaration itself sends an unmistakably bullish message. It’s a vote of confidence. Nobody promises more if they are expecting cash flows to soon falter.

With all these points in mind, it’s not surprising to learn that the Dividend Aristocrats have held their ground relatively well during volatile market selloffs.

During the massive fourth-quarter plunge of 2008 (the worst since the Great Depression), this group only lost 16.4%, versus a much steeper 21.9% decline in the S&P 500. During the last five bear market pullbacks, the Aristocrats outperformed the S&P all five times.

And they are often quicker to recover – taking less than 12 months to rebound into positive territory on four of those occasions.

But that downside protection doesn’t mean you have to sacrifice too much upside potential. Since inception in 2013, the Proshares S&P Dividend Aristocrats ETF (NYSE: NOBL) has posted healthy annualized gains of nearly 11%.

If you’re looking for a core equity income fund to anchor a portfolio, there are worse places to look.