Understanding the Dividend Aristocrats: How to Identify and Invest in Strong, Consistent Companies?

The Dividend Aristocrats are a select group of S&P 500 companies that have increased their dividends for at least 25 consecutive years. These companies have a track record of paying dividends and consistently increasing them, which is a sign of financial strength and stability.

In this post, we'll take a closer look at what it means to be a Dividend Aristocrat, why they're attractive to investors, and some examples of companies that currently hold this distinction.

What is a Dividend Aristocrat stock?

Reliable dividend yields are not typical in the business world. They are typically found in companies with stable operations, resilient to market fluctuations, and strong enough to maintain profitability in adverse economic conditions.

These companies are known as Dividend Aristocrats. They can be found in various industries such as healthcare, retail, oil & gas, and construction. However, as of 2022, only 65 S&P 500 companies still hold this title.

Many investors often assume that a startup can pay dividends if it grows quickly. But it's not always the case. Younger and rapidly growing companies rarely pay dividends as their management prefers to channel earnings back into operations for sustained high growth. These companies may not have sufficient funds to pay dividends yet.

In contrast, well-established, mature companies that generate consistent profits are more likely to pay dividends to reward their shareholders, even if their stock prices may not experience regular growth.

Why are Dividend Aristocrats attractive to investors?

One of the primary reasons investors are drawn to Dividend Aristocrats is their consistency.

These companies have a long history of paying and increasing dividends, which means they can generate stable cash flow.

Additionally, because they have a history of raising dividends, they are often seen as committing to returning value to shareholders. This is particularly attractive to income-focused investors, such as retirees, who rely on dividends as a source of income.

Another reason investors may be attracted to Dividend Aristocrats is that they tend to be large, well-established companies. Many of them have been around for decades and have a strong track record of performance. They also tend to have a diverse range of products and services, which helps to insulate them from market fluctuations and economic downturns.

It's worth noting that not all Dividend Aristocrats are created equal. While they all have a long history of paying and increasing dividends, some companies may have stronger financials and better growth prospects than others.

Let's take a closer look at the list of 65 companies still holding the Dividend Aristocrat title.

1. 3M Co. (MMM)
2. A.O. Smith Corp. (AOS)
3. Abbott Laboratories (ABT)
4. AbbVie Inc. (ABBV)
5. Aflac Inc. (AFL)
6. Air Products and Chemicals Inc. (APD)
7. Albemarle Corp. (ALB)
8. Amcor PLC (AMCR)
9. Archer-Daniels-Midland Co. (ADM)
10. Atmos Energy Corp. (ATO)
11. Automatic Data Processing Inc. (ADP)
12. Becton, Dickinson & Co. (BDX)
13. Brown & Brown Inc. (BRO)
14. Brown-Forman Corp. (BF-B)
15. Cardinal Health Inc. (CAH)
16. Caterpillar Inc. (CAT)
17. Chevron Corp. (CVX)
18. Chubb Ltd. (CB)
19. Church & Dwight Co. Inc. (CHD)
20. Cincinnati Financial Corp. (CINF)
21. Cintas Corp. (CTAS)
22. The Clorox Co. (CLX)
23. The Coca-Cola Co. (KO)
24. Colgate-Palmolive Co. (CL)
25. Consolidated Edison Inc. (ED)
26. Dover Corp. (DOV)
27. Ecolab Inc. (ECL)
28. Emerson Electric Co. (EMR)
29. Essex Property Trust Inc. (ESS)
30. Expeditors International of Washington Inc. (EXPD)
31. ExxonMobil Corp. (XOM)
32. Federal Realty Investment Trust (FRT)
33. Franklin Resources Inc. (BEN)
34. General Dynamics Corp. (GD)
35. Genuine Parts Co. (GPC)
36. Hormel Foods Corp. (HRL)
37. Illinois Tool Works Inc. (ITW)
38. International Business Machines Corp. (IBM)
39. Johnson & Johnson (JNJ)
40. Kimberly-Clark Corp. (KMB)
41. Linde PLC (LIN)
42. Lowe's Cos. Inc. (LOW)
43. McCormick & Co. (MKC)
44. McDonald's Corp. (MCD)
45. Medtronic PLC (MDT)
46. NextEra Energy Inc. (NEE)
47. Nucor Corp. (NUE)
48. Pentair PLC (PNR)
49. People's United Financial Inc. (PBCT)
50. PepsiCo Inc. (PEP)
51. PPG Industries Inc. (PPG)
52. Procter & Gamble Co. (PG)
53. Realty Income Corp. (O)
54. Roper Technologies Inc. (ROP)
55. S&P Global Inc. (SPGI)
56. Sherwin-Williams Co. (SHW)
57. Stanley Black & Decker Inc. (SWK)
58. Sysco Corp. (SYY)
59. T. Rowe Price Group Inc. (TROW)
60. Target Corp. (TGT)
61. VF Corp. (VFC)
62. W.W. Grainger Inc. (GWW)
63. Walgreens Boots Alliance Inc. (WBA)
64. Walmart Inc. (WMT)
65. West Pharmaceutical Services Inc. (WST)

These stocks have good liquidity and high trading volume, which makes them attractive for both long-term investors as well as short-term traders. However, you must remember that any investment is a risk, even if it is in such well-known companies. That's why it is essential to research and consider factors such as the company's financials, industry trends, and management team before making a decision.

Pros and cons of Dividend Aristocrats.

Often it seems that investing in well-known and stable companies has no disadvantages. But it's not always the case. Let's talk not only about the pros but also the cons of investing in the Dividend Aristocrats.

Pros:

• Offers a reliable source of income for investors;
• Signifies strong financial performance and stability.

Cons:

• Instead of growth opportunities, the company chooses the payment of dividends, which can slow down its development and subsequent growth or the ability to resist crises;
• Dividend-paying stocks may have a lower potential for capital appreciation;

What is the difference between Dividend Aristocrats and Dividend Kings, then?

While a Dividend Aristocrat must have an increasing dividend payout for at least 25 years and be a part of the S&P 500, for a Dividend King, it is enough (read it like - must) to have a consistent dividend increase for a minimum of 50 years.

However, it is less common for companies to maintain increasing dividends for that long, resulting in fewer dividend kings than dividend aristocrats. It is also possible for a company to be both. For example, Colgate-Palmolive (NYSE: CL) is a Dividend Aristocrat and is also a Dividend King.

Are Dividend Aristocrats recession-resistant investments?

These companies are often mature, well-established businesses with a strong financial positions and can weather economic downturns. Because of this, they can be attractive to investors looking for stability during a recession since they can help offset any stock price losses.

However, it is important to note that while Dividend Aristocrats may be less vulnerable to economic downturns than other stocks, they are not immune to them.

The companies that make up the index will still be affected by the economic downturns, which will impact the revenues and profits, and then the dividends. It is also important to note that dividend Aristocrats are not high-growth companies, and their dividends often represent a larger proportion of their earnings, thus making their dividends more vulnerable to cut.

Please, keep in mind that Dividend Aristocrats are not risk-free investments. It is always important to do your research before investing in any stock, including Dividend Aristocrats. To spread out risk, it is also important to have a diversified portfolio that includes a mix of different types of stocks and bonds.

Overall, Dividend Aristocrats can be a good option for investors looking for stable income during a recession, but they should be considered as part of a diversified investment strategy and not as the sole portfolio.