Seeking Income? Dividend Aristocrats Are King
Investors seeking long-term dividend growth should become familiar with the S&P 500’s Dividend Aristocrats.
By definition, a Dividend Aristocrat must be in the S&P 500 index and have recorded dividend increases for at least the past 25 consecutive years. A company must also meet certain market capitalization and liquidity requirements to appear on the list.
Why should investors care about this list? Dividend Aristocrats have historically outperformed the S&P 500. Over the past 10 years, the Dividend Aristocrats have earned 16.4% annually, versus 15.2% for the S&P 500. They have likewise outperformed the S&P 500 for the most recent one-year and five-year periods, but did lag the S&P 500 over the past three years.
The first list of Dividend Aristocrats contained 26 companies and was published in 1989. Each year the list is updated. The list peaked at 64 companies in 2001, and contracted sharply during the financial crisis of 2008-2009. The 2019 list consists of 57 companies with the following sector breakdown:
Source: S&P Global
There are two caveats I should mention on the Dividend Aristocrats. Even companies with a long track record of dividend increases can implode. General Electric (NYSE: GE) was on the list until 2010, and only came off after the share price had fallen more than 50% as a result of the financial crisis.
Second, you might expect that companies that have raised their dividends for at least 25 consecutive years would have attractive dividends. You would be wrong for the most part. Most of the companies on the list have yields that are pretty low for dividend investors.
Of the 57 companies on the current list, 43 yield less than 3%. The average yield for the entire list is 2.46%. But that’s still a bit better than the S&P 500, which has seen its yield drop to 1.9%.
Dividend Paying Standouts
I won’t reproduce the entire list here, but there are many familiar names: Walmart (NYSE: WMT), Medtronic (NYSE: MDT), Johnson & Johnson (NYSE: JNJ), and Pepsico (NSDQ: PEP), to name a few. Instead, I want to focus on the highest-yielding companies in list.
There are six companies on the list that yield at least 4%. They are AT&T (NYSE: T), AbbVie (NYSE: ABBV), Cardinal Health (NYSE: CAH), People’s United Financial (NSDQ: PBCT), ExxonMobil (NYSE: XOM), and Chevron (NYSE: CVX).
Cardinal Health’s inclusion on the list is controversial, because some analysts argue that the firm has only increased its dividend for 23 years. CAH also is the worst performer on the entire list over the past year, with a total return of -23%.
This highlights the reason that the dividends of these companies are high. Yields rose because each of these companies under-performed the S&P 500 over the past year. In fact, only ExxonMobil and Chevron in this group even have a positive total return over the past year.
But this dynamic also suggests where to find potential value on the list. Although I am not as familiar with Cardinal Health or People’s United, AT&T, AbbVie, ExxonMobil and Chevron all pop up on my value screens on a regular basis. In fact, I have bought three of the four for my own portfolio in the past six months.
Given the long track record of dividend increases, and payout ratios that are conservative enough to provide a safety cushion against deteriorating fundamentals, these four would be high on my list. With an average yield of 5.0%, the offer an opportunity to begin building an income portfolio at a reasonable value.
For those interested in investing in the entire list of Dividend Aristocrats, there are multiple exchange-traded funds (ETFs) based on the list.
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