Best Dividend Aristocrats Strategy Analysis – Yield, Performance, And ETFs

Without accounting for dividends, the S&P 500 index returned 129.95% from January 2000 to January 2020. However, with all the dividends paid by the stocks in the index during that time reinvested immediately after they are paid, the return would’ve jumped up to 235.65%. This shows how dividend income can affect returns, which is why investors are interested in a group of stocks within the S&P 500 that pay dividends much more reliably than other companies. Those stocks are called the dividend aristocrats.

A dividend aristocrat is a company in the S&P 500 index that consistently raises its dividend payout every year for at least the past 25 years. The company must maintain a total market cap of USD$3 billion (float-adjusted) and over USD$5 million in daily share trade value for the past three months. An index of the stocks that qualify as dividend aristocrats is known as the S&P 500 Dividend Aristocrats.

There are other things you would like to know about dividend aristocrats, so keep reading. At the end of the article, we backtest the strategy. If you want more profitable investment strategies, you might want to check out that clickable link.

What is the highest paying Dividend Aristocrat?

There are not many companies that can maintain high dividend yields but the few that do usually have very stable businesses, with recession-proof products, allowing them to keep taking in profits and paying dividends even while other companies are struggling.

In general, large, established companies with predictable profits are better dividend payers — as many of them do not enjoy regular, robust growth or rising stock prices, they tend to issue regular dividends as an alternative way of rewarding their shareholders.

On the other hand, startups and fast-growing tech companies rarely offer dividends at all, as their management teams prefer to reinvest any earnings back into the operations to help sustain higher-than-average growth.

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Thus, only a few companies qualify as dividend aristocrats, which are companies in the S&P 500 index that not only consistently pay a dividend to shareholders but consistently raise the dollar amount of their dividend payout every year for at least the past 25 years. In addition, each of these companies must maintain a total market cap of USD$3 billion (float-adjusted) and over USD$5 million in daily share trade value for the past three months.

Owing to how difficult it is to qualify as a dividend aristocrat, there are usually fewer than 100 dividend aristocrats at any given time. For example, there were only 65 dividend aristocrats listed among the Standard & Poor’s 500 in 2021, across all the sectors, including health care, retail, oil and gas, and construction.

Dividend aristocrats usually pay high yields and since some pay quarterly or yearly and stock prices change all the time, it is not easy to know the highest-paying one.

As of May 2022, International Business Machines Corporation (NYSE: IBM) is one of the highest-paying dividend aristocrats.

IBM is an American multinational technology company that provides integrated solutions through software, consulting, infrastructure, and financing segments. The company declared, on the 26th of April 2022, a $1.65 per share quarterly dividend, which represents a 0.6% increase from its last dividend of $1.64. The dividend, which was payable on June 10, for shareholders of record on May 10. 2022, marks the 27th year consecutive year that the company has increased its quarterly cash dividend. With that, the company’s dividend yield on May 6 2022 stood at 4.83%, making it one of the highest yields among dividend aristocrats.

What is the difference between dividend aristocrats and kings?

Dividend aristocrats and dividend kings are quite similar, as they both refer to companies that are known for paying out dividends consistently over a long time.

However, while a dividend aristocrat must be a member of the S&P 500 and have an increasing dividend payout over 25 years or more, a dividend king is a company that has been paying an increasing dividend consistently for at least 50 years.

Thus, not all aristocrats will be dividend kings. For instance, dividend aristocrats that have not been around for 50 years or have not been paying consistently increasing dividends for 50 years cannot qualify.

Of course, it is rare 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.

Also, while some dividend kings will also be dividend aristocrats, not all dividend kings are dividend aristocrats. A dividend king cannot be a dividend aristocrat if it is not a component of the S&P 500 Index.

How do I invest in dividend aristocrats?

As an investor, it is smart to look for ways to diversify your portfolios and spread out your risks across different stocks and assets. Dividend aristocrats present one of the safest stocks to invest in, as they are stable, income-generating companies, and you can earn returns both from capital appreciation and dividends.

While you can invest in individual dividend aristocrats, you can invest in an ETF that tracks the Dividend Aristocrat index (NOBL). This is an index of all the stocks that qualify as dividend aristocrats. It is a high-performance index and consists of approximately 60 large-cap stocks over a wide variety of sectors and is often considered an attractive index to invest in, as it includes many stable growth-oriented stocks. ETFs make it easy to have a diversified dividend aristocrat portfolio.

Another way to invest in dividend aristocrats is via mutual funds that invest in the Dividend Aristocrat Index. Although mutual funds may be more expensive than ETFs, they offer less savvy investors the opportunity to invest through their local financial institution if they do not have a discount brokerage account or a stockbroker of their own.

What companies are in the S&P 500 Dividend Aristocrats index?

Simply known as the Dividend Aristocrat index, the S&P 500 Dividend Aristocrats index is an index of the stocks that qualify as dividend aristocrats. It currently consists of over 60 large-cap stocks across a wide variety of sectors. Some criteria must be met for a stock to qualify to be a part of the index.

Here are the eligibility criteria for a company to be listed in the Dividend Aristocrats:

  • It must be a component of the S&P 500 Index
  • It must have been increasing dividend payments for at least 25 consecutive years
  • It must maintain a total market cap of USD$3 billion (float-adjusted)
  • It must maintain USD$5 million in daily share trade value for the past three months

The above criteria are used to determine which stocks are included in the Dividend Aristocrats index. As of June 22, 2022, there are 65 Dividend Aristocrats. Here are the top 25 of them:

Company Name Ticker Symbol Yield
Walgreens Boots Alliance WBA 5.05%
Franklin Resources BEN 4.96%
International Business Machines IBM 4.72%
3M MMM 4.66%
VF VFC 4.58%
Federal Realty Investment Trust FRT 4.48%
Realty Income Corp. O 4.30%
T. Rowe Price TROW 4.18%
Exxon Mobil XOM 4.09%
Chevron CVX 3.92%
Amcor AMCR 3.87%
Cardinal Health CAH 3.78%
AbbVie ABBV 3.72%
Kimberly-Clark KMB 3.42%
Essex Property Trust ESS 3.35%
Consolidated Edison ED 3.28%
Clorox CLX 3.26%
Target TGT 3.07%
Medtronic MDT 3.03%
Stanley Black & Decker SWK 2.98%
Aflac AFL 2.88%
Coca-Cola KO 2.77%
PepsiCo PEP 2.75%
Caterpillar CAT 2.72%
Air Products & Chemicals APD 2.71%

Companies are added or removed from the index once a year based on the listed requirements, but there is also a reweighting that is completed quarterly to make sure that each member company takes up an equal weighting within the index.

One of the unique features of the index is that it generally sees an exceptionally low turnover, which shows the exemplary status of companies that remain within the Dividend Aristocrats as a symbol of prominence.

It is rare for a company to lose its status within the index and may only happen during tumultuous economic times and recessions. For instance, only two companies were removed between 2017 and 2019 – one that occurred due to a dividend rate cut, and the other due to an acquisition by another member company.

However, many financial stocks were excluded during the financial crisis in 2008/09, so this is far from bullet-proof.

Is there an ETF that tracks the Dividend Aristocrats?

Investing in individual stocks is tough, even when the stocks are dividend aristocrats, which are known to be fairly stable. You will have to research the stocks before buying, and that takes time and energy. If you want to build a portfolio of dividend aristocrats, you will have to research tens of them.

Moreover, building a portfolio of stocks by investing in individual stocks takes a lot of money too — you may need thousands of dollars to create a portfolio of the 25 dividend aristocrats listed above.

An easy and cheaper way to invest in a portfolio of dividend aristocrats is to buy an exchange-traded fund (ETF) that contains dividend-raising stocks instead. One of such ETFs is the ProShares S&P 500 Dividend Aristocrats ETF (NOBL). This is the only one that strictly tracks the 64 official S&P 500 dividend aristocrats.

Dividend aristocrats in other markets

There are dividend aristocrats in other markets across the world, though the criteria for stock selection vary from those of the US market.

For example, the S&P Europe 350 Dividend Aristocrats index measures the performance of S&P Europe 350 constituents that have followed a policy of consistently increasing dividends every year for at least 10 consecutive years, instead of 25 years.

For the Asian markets, the S&P Pan Asia Dividend Aristocrats index measures the performance of constituents within the S&P Pan Asia Broad Market Index (BMI) that have followed a policy of consistently increasing dividends every year for at least seven years.

Dividend Aristocrats strategy – backtest, performance, returns

How has the Dividend Aristocrats performed?

To conduct our analysis, we obtained data from yahoo!finance and measured the performance of the Dividend Aristocrats against the S&P 500.

For this purpose, we utilized the ETF with the ticker code NOBL to represent the Dividend Aristocrats and compared it to the ETF that tracks the S&P 500 (SPY). It is worth noting that dividends were reinvested, and here is an overview of the resulting performance:

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