Why The Dividend Aristocrats Still Matter — And 5 Traits They Have In Common…

The late 90s may seem like yesterday for some of us. But in business terms, it’s practically eons ago. That’s why it’s so impressive when you find a company that has managed to stay ahead of the tide of change to not only survive, but thrive in any economic climate.

That’s why I’m a fan of the Dividend Aristocrats. In fact, I think every investor should have at least a few of them in their portfolio.

I’m sure many of you may already agree with that sentiment. But if you still need convincing, then here’s why…

Dividend Aristocrats come from all corners of the market, selling everything from hamburgers to steel to missile defense systems. Many industries have representation, including consumer staples, telecom, technology, and banking. But all these businesses share one key trait: the fortitude to raise dividends for at least the past 25 consecutive years.

It’s no secret that we are big fans of dividend payers over at my premium newsletter service, High Yield Investing. Those reliable quarterly distributions have accounted for a surprisingly large portion of the market’s total returns over the long-haul. But if there’s one thing better than a regular dividend, it’s one that grows with each passing year.

Introducing: The Dividend Aristocrats

Fortunately, while the average S&P 500 stock may yield a little less than 2%, there are plenty that yield more. But as I’ve warned my premium readers many times before, investors shouldn’t be so quick to fall in love with a stock’s yield.

Think about it… I’d be much happier to sacrifice a little bit of yield right now if it means I can own a stock that steadily increases its dividend year after year. Not only will my income grow, but I’m also much more likely to enjoy strong overall returns.

Dividend hikes are plentiful right now. But not every business had the financial health to raise payouts during the Covid-related shutdowns, for example. There were hundreds of companies that simply maintained their current distribution or were forced to cut.

That’s what makes the Dividend Aristocrats such a rare breed. All it takes is one bad year, and an otherwise solid company with maybe 15 or 16 straight increases under its belt has to start back over at zero.

So who is in this special group? Some highlights include familiar names such as Coca-Cola (NYSE: KO) and Wal-Mart (NYSE: WMT). Those stocks have increased dividends for 61 and 50 years, respectively. But some of the 68 members are largely unknown…

Take A.O. Smith (NYSE: AOS), for example. This company makes water heaters for residential and commercial use and has grown its dividend by about 16.5% annualized over the past five years. Or Becton Dickinson & Company (NYSE: BDX), a top supplier of medical devices and laboratory instruments (51 years of dividend growth). These aren’t exciting product lines – but boring can be good.

5 Traits The Dividend Aristocrats Have In Common

Forget about complicated stock screens using esoteric data. Some work, others don’t. There are worse strategies than simply focusing your investment search on the Aristocrats. You won’t find any riff-raff in here. Less than 1% of U.S. listed stocks gain admittance to this exclusive society.

Even without combing through SEC filings, we instinctively know that an Aristocrat possesses each of these desirable traits.

1. Proven Business Model:

For every new business that succeeds, there are maybe a dozen that fail. Every Aristocrat has been tested in the arena of combat. Most are mature leaders in their fields with established national brands, efficient distribution systems and other protective economic moats that provide a competitive advantage, the key to maintaining superior long-term returns.

2. Surplus Cash Flow:

There’s a well-known market axiom that “dividends don’t lie.”

Reported GAAP earnings can be bent, twisted, and manipulated. But you can’t fake cash distributions. Either the money is there or it isn’t. Since other operating needs (payroll, rent, etc.) are always met first, the simple act of a voluntary dividend tells us there is a cash surplus to share.

Raising the payment also sends a bullish message. Nobody promises more if they are expecting income to falter. Reaching Aristocrat status is the hallmark of a quality business that consistently generates more cash than it needs.

3. Expanding Bottom Line:

It’s been said that all businesses are either growing or dying. You can usually rule out the latter with an Aristocrat. After all, it’s nearly impossible to hand out tens (or hundreds) of millions in additional dividend payments each year for a prolonged period if the earnings pool is shrinking.

Sure, an Aristocrat may go through the occasional slump. But they usually don’t last long. Common sense says that 25 straight years of rising dividends reflect an underlying business that has far more good years than bad.

4. Conservative, Shareholder-Friendly Management:

Having the ability to generously raise dividends is one thing – the willingness is something else entirely.

History is littered with companies that were run into the ground by ill-advised mergers, reckless spending, and other questionable decisions. Many didn’t pay a penny in dividends.

Aristocrats are run by skilled management teams that know how to balance the deployment of capital, investing what is needed to grow the business and returning the rest to stockholders.

It also goes without saying that once a company has qualified for Aristocracy, it wants to stay there. These impressive dividend track records are also attractive selling points to the investment community. So companies with winning streaks on the line tend to avoid taking any unnecessary risks that might jeopardize their dividends.

5. Weather-proof:

Any company can raise dividends when the economy is red-hot. The true test is whether it can still generate excess cash flow when conditions cool.

By virtue of their membership, Dividend Aristocrats have demonstrated an ability to not only withstand severe downturns – but continue raising their distributions without skipping a beat. Some long-time members such as Johnson & Johnson (NYSE: JNJ) and Procter & Gamble (NYSE: PNG) haven’t missed an annual dividend hike in more than 60 years, a period that includes no less than seven major economic troughs.

That doesn’t happen without products that are, to varying-degrees, recession-resistant.

Action To Take

With all these points in mind, it’s not surprising to learn that the Dividend Aristocrats have held their ground relatively well during fierce market downturns. During the massive fourth-quarter selloff of 2008 (the worst since the Great Depression), for example, this group only lost 16.4%, versus a much steeper 21.9% decline in the S&P 500.

It’s no wonder then, that billions have poured into funds such as the Proshares S&P Dividend Aristocrats ETF (NYSE: NOBL). If you’re looking for a broad basket approach to the Aristocrats, then that’s your ticket.

Funds like this certainly have their merits, but I’d rather pick my own favorites (and save the fees). Over at High-Yield Investing, we already own a few of these names — including one I’ve written about several times, Realty Income.

If you’re looking for income and want to “keep it simple”, then the Aristocrats are a great way to go. But if you’re looking for a the absolute best high yields this market has to offer, then you should check out my latest research…

You’ll learn about 5 “Bulletproof Buys” that have weathered every dip and crash over the last 20 years and STILL hand out massive gains to investors. You’ll also learn more about High-Yield Investing and how to get full access to my premium portfolio.

Go here to learn more now.