What Is a Dividend Aristocrat?

And why it matters to small investors

Photo by ZSun Fu on Unsplash

I only invest in stocks that pay dividends.

What’s a dividend?

When a company pays a dividend it returns a share of its profits to shareholders via a dividend payment. Companies usually make this payment quarterly, however roughly 50 or so of the 3,000 pay monthly dividends. The amount of dividend income you receive depends on how many shares you own.

Let’s say a company pays an annual dividend of $1.00 per share. If you own 100 shares of the company’s stock, you’ll receive $100 in dividend income each year. Paid out quarterly, you get $25 every three months.

Just because a stock pays a dividend doesn’t mean you should invest in it. We’ll save this story for another day, but bad or unsustainable dividends exist. It can be tough to identify them, especially if you have limited experience dealing with dividend investing-related metrics.

However, there’s one way to increase your chances of picking solid dividend-paying stocks. This is to place focus — for at least part of your portfolio — on selecting dividend aristocrats.

A dividend aristocrat has increased its annual dividend, every year, for at least 25 consecutive years.

If a company pays a $1.00 annual dividend in year one and a $1.05 annual dividend in year two, it increased its dividend by 5 percent. It doesn’t matter how much a company increases its dividend by, as long as it does it.

Of course, a history of significant dividend increases can be a good sign. A token increase might be a red flag. You’ll need to look deeper into the company’s growth story and financial health.

Here’s a list of dividend aristocrats, as of June 2020.

The names at the top of the list have increased their dividends for a whopping 57 years in a row. You likely know some of the names, but not others.

One thing I like to do is consider future dividend aristocrats. Strong companies that have realistic potential to hit the 25-year mark and continue increasing their dividend once they become aristocrats.

All else equal, dividend increases represent a sign of financial strength. Companies that not only pay, but consistently increase their dividends tend to have the free cash flow to return increasing amounts of money to shareholders.

Investors benefit because the income they receive from a position in a dividend-paying stock will continue to increase even they don’t make new purchases of the stock. You can take your dividend payments as cash or reinvest them in new shares of the stock.

Of course, the bigger the dividend payment, the greater number of shares you can buy. As your position size increases, so does your dividend payment. At this juncture, you’re on the way to realizing the power of compounding.

For small investors, this is the easiest and, I think, most compelling way to build wealth. Given the large universe of stocks, it’s nice to have ways to narrow the playing field. Focusing on dividend aristocrats and future dividend aristocrats tends to make sense for many investors.

I write about doing life and personal finance, focusing on the psychology of our relationships with other people and money. I’m anti-guru, pro-empowerment.

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