DEFINITION of 'Dividend Aristocrat'

A dividend aristocrat is a company that has continuously increased the size of dividends it pays to its shareholders. To be considered a dividend aristocrat, a company must typically raise dividends consistently for at least 25 years. More specifically, the company needs to have a managed dividend policy that increased its dividend every year for those 25 years.

BREAKING DOWN 'Dividend Aristocrat'

Companies that are able to maintain high dividend yields are often very stable. Because stocks maintaining the title of dividend aristocrat must keep yields consistently high, the list is often under 100 companies.

TheStreet.com highlighted five dividend aristocrats that investors should consider in 2018, based on their dividend streaks and "strong buy" analyst consensus ratings over a three-month period. These include the following (in order):

  • Abbott Laboratories (ABT)
  • McDonald's Corporation (MCD)
  • Chevron Corporation (CVX)
  • Medtronic plc (MDT)
  • Stanley Black & Decker Inc. (SWK)

To pick one example: Abbott Laboratories has declared dividends for 376 consecutive quarters since 1924 and has increased the dividend payout for 46 consecutive years.

These picks cross healthcare, retail, oil and gas, and construction industries. In contrast, startups and other high-growth companies such as those in technology rarely offer dividends. Instead, these teams often prefer to reinvest any earnings back into their operations to help sustain higher-than-average growth. In addition, fledgling companies are often running at a net loss and don’t have extra cash on hand to distribute for a while. Larger, more established companies with more predictable profits are better dividend payers. These companies tend to issue regular dividends as they seek to maximize shareholder wealth in ways aside from supernormal growth.

Dividend aristocrats are rare because most companies are unable to continually boost dividend payouts while also facing recessions and market shocks. Two of the more popular ways of tracking this type of company are through the S&P Dividend Aristocrats and the S&P High-Yield Dividend Aristocrats indexes.

Dividend Aristocrat and Corporate Dividend Policies

Companies develop dividend policies that structure dividend payouts in different ways. In general, three major types of dividend policies exist: a stable dividend policy, a constant dividend policy and a residual dividend policy.

With a stable dividend policy, shareholders receive steady and predictable dividend payouts each year, regardless of earnings fluctuations. With a constant dividend policy, the company pays a percentage of earnings to shareholders every year. In this way, investors experience the full volatility of company earnings. With a residual dividend policy, the company pays out what dividends remain after it has paid for capital expenditures and working capital.

 

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