Dividend Aristocrat: Definition, Criteria, Example, Pros and Cons

What Is a Dividend Aristocrat?

A dividend aristocrat is a company in the S&P 500 index that not only consistently pays a dividend to shareholders but annually increases the size of its payout.

A company will be considered a dividend aristocrat if it raises its dividends consistently for at least the past 25 years. Some aficionados of dividend aristocrats rank them according to additional factors such as company size and liquidity, for instance having a market capitalization in excess of $3 billion.

Key Takeaways

  • A company is a dividend aristocrat if it increases the dividend it pays to shareholders for at least 25 straight years.
  • A dividend aristocrat must also be a member of the S&P 500, and some investors may add additional screening criteria.
  • They tend to be large, established companies that no longer enjoy supercharged growth.
  • Many are largely recession-proof, enjoying steady profits and growing dividends in good times and bad.
  • Dividend aristocrats are similar to dividend kings, which are firms increasing dividends annually for more than 50 years.

Understanding the Dividend Aristocrat

Companies that are able to maintain high dividend yields are relatively rare, and their businesses are usually very stable. They tend to have products that are recession-proof, allowing them to keep taking in profits and paying dividends even while other companies are struggling.

There are usually fewer than 100 dividend aristocrats at any given time. In 2021, just 65 dividend aristocrats were listed among the Standard & Poor's 500. They can be found in many sectors, including health care, retail, oil and gas, and construction.

Startup companies and high flyers in technology rarely offer dividends at all. Their management teams prefer to reinvest any earnings back into the operations to help sustain higher-than-average growth. Some fledgling companies even run at a net loss and don’t have the cash on hand to pay dividends.

Large, established companies with predictable profits are better dividend payers in general. Many do not enjoy regular, robust growth or a constantly rising stock price. These companies tend to issue regular dividends as an alternative way of rewarding their shareholders.

Examples of Dividend Aristocrats

Analysts have many ways to evaluate dividend aristocrats as investments. They include the growth of the stock prices of companies over time, their resilience to a downturn in the stock market, and their expectations for future prosperity. That means there is an ever-changing hierarchy among dividend aristocrats.

Forbes selected its top dividend aristocrats for 2021 based on its expectations of the companies' total future returns. Note that these choices—particularly Exxon Mobil—were made prior to the 2021 collapse in oil prices sparked by the spread of the novel coronavirus. 65 stocks meet the criteria required to be a dividend aristocrat in 2021. Some examples include:

  • AT&T (T)
  • Exxon Mobil (XOM)
  • Walgreens Boots Alliance (WBA)
  • AbbVie (ABBV)
  • IBM (IBM)
  • 3M (MMM)
  • Caterpillar (CAT)

Two ways to track the performance of these stocks include the S&P Dividend Aristocrats index and the S&P High-Yield Dividend Aristocrats index.

Advantages and Disadvantages of Dividend Aristocrats

A company that pays out an ever-increasing dividend is ideal for investors looking for stable income, and being such a company is a positive signal that the firm is on sound financial footing. Remember, however, that a dividend is a portion of a firm's profits that it is paying to its owners (shareholders) in the form of cash—any money that is paid out in a dividend is not reinvested in the business.

If a business is paying shareholders too high a percentage of its profits, it may be a sign that management prefers not to reinvest in the company given a lack of growth opportunities. Therefore, a dividend aristocrat may be squandering growth opportunities, or not have any such opportunities to redirect profits.

Moreover, company management can use dividends to placate frustrated investors when the stock isn't appreciating. That said, if a dividend aristocrat is able to grow the payout it gives to shareholders on a regular basis, it does imply some organic level of growth in order to fund those payments.

  • Provides stable income for shareholders

  • Is a positive signal indicating strong financials

  • Dividends may be paid in lieu of growth opportunities

  • Dividend stocks may produce lesser capital gains

  • Dividend payments are taxable events

Dividend Aristocrats vs. Dividend Kings

Similar to the dividend aristocrats, "dividend kings" are companies that are known for paying out dividends consistently over time. While a dividend aristocrat must be a member of the S&P 500 and have an increasing dividend payout over 25 years or more, to qualify as a dividend king a firm must only meet one hurdle: paying an increasing dividend consistently for at least 50 years.

Some dividend kings will also be dividend aristocrats, and not all aristocrats will be dividend kings (for instance, they have not been around for 50 years or are not in the S&P 500). It is less common for companies to consistently increase their dividends for over half a century, so the number of dividend kings tends to be fewer than their aristocrat cousins.

54+ years

Dividend King, The Tootsie Roll Co. (TR) has increased its annual cash dividend for 54 consecutive years and has paid continuous quarterly dividends for even longer. 

Identifying Other Quality Dividend Payers

In general, companies have dividend policies that fall into three categories: A stable dividend policy, a constant dividend policy, or a residual dividend policy.

  • If a company has a stable dividend policy, the shareholder can expect steady and predictable dividend payouts every year, regardless of fluctuations in the company's earnings.
  • If it has a constant dividend policy, the company pays a percentage of its profits to shareholders every year, so investors experience the full volatility of company earnings.
  • If it has a residual dividend policy, the company pays out in dividends whatever money remains after it has taken care of its capital expenditures and working capital.

Dividend Aristocrat FAQs

How Can You Build a Dividend Aristocrat Portfolio?

All companies that are dividend aristocrats are members of the S&P 500, and so one can identify those stocks and construct a dividend-focused portfolio. In 2021, there were 65 such stocks, which can be found by searching the internet, as several financial sites maintain up-to-date lists of the dividend aristocrats, like the ones offered by Dogs of the Dow or Sure Dividend.

How Much of a Portfolio Should You Dedicate to Dividend Aristocrats?

The weight given to dividend stocks will depend on several factors, including your risk tolerance, time horizon, need for current income, and tax situation. Because dividend aristocrats tend to be large, mature companies with fewer growth prospects, they can be less volatile but also carry lower expected returns. Retired individuals may especially benefit from the relatively lower risk and additional income that these stocks provide.

Do Dividend Aristocrats Outperform the Market?

This will depend on the time period examined. As of 2021, the Dividend Aristocrats Index has performed almost identically to the broader market over the last decade, with a 14.3% total annual return for the dividend aristocrats versus 14.2% for the S&P 500 Index. However, on a risk-adjusted basis, the dividend aristocrats have exhibited somewhat lower volatility than the broader market.

Is It Good to Invest in Dividend Aristocrats During a Recession?

Since these companies are mature and have weathered economic downturns before, increasing dividends during recessions no less, it can make sense to seek these stocks out as safe havens while growth stocks flounder.

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