When it’s time to create your stocks portfolio, one of the things to decide is if you want to go for value or dividends (stocks). With the first, you choose companies (or mix of companies) that are expected to grow in value, therefore increasing the price of their stocks. With dividends, you typically target companies that are pretty stable, but that give an higher than average dividend. Of course, there are some things to keep in mind; some companies raise on purpose dividends, not necessarily because their business is doing well but the contrary. In fact, in order to avoid a massive sell out (and consequent decline in the stock’s value), companies can decide to increase their dividends. As you can understand it’s a very simple tactic to keep shareholders happy when things are not going very well.

Now let’s say that you want to have a pretty stable inflow of money, that pay more than a savings account. Dividends stocks is one of your best options. Yes but how do you choose them? It would be nice to have a list of companies that have been constantly paying dividends, even during financial bubbles, right? Meet the “Dividends Aristocrats”.

The “Dividends Aristocrats” are a group of stocks that have consistently increased their dividends are considered the “best of the best” dividend growth stocks.

There are different types of Aristocrats, a few examples are:

  • S&P 500 Dividend Aristocrats
  • Canadian Dividend Aristocrats
  • United Kingdom (UK) High Yield Aristocrats
  • S&P Euro High Yield Dividend Aristocrats
  • S&P Europe 350 Dividend Aristocrats

The definition of an “aristocrat” varies vary from one type of index versus another but generally a company must have raised dividends for at least 25 years (every year for those 25 years).

As you can imagine Dividend aristocrats are rare because most companies don’t manage to continually increase dividend payouts while also facing bubbles, recessions and market shocks. The list of aristocrats is often under 100 companies.

How do you track them?

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.

The S&P 500 Dividend Aristocrat index, launched in 2005,  has historically outperformed the S&P 500 index with lower volatility over longer investment time frames. For example, over the period 2007-2017, the S&P 500 Dividend Aristocrat index has returned 12.14% on an average annual basis, compared to the S&P 500 index which has returned only 8.50% annually during that same period.

Source: Proshares

Also, if we consider the standard deviation (which is often used to measure the risk) of the S&P 500 during this same 10 year period, it was 15.08% while the Dividend Aristocrat standard deviation was 14.02% or 7.03% lower than the S&P 500. Better returns and lower risk!

To be eligible for the S&P 500 Dividend Aristocrat index, a stock must have increased their dividend payouts for a minimum of 25 consecutive years or more, must currently be part of the S&P 500 index and finally must have a minimum market capitalization of $3 billion. If a company reduces their dividend or is dropped from the S&P 500 index, the holding is automatically dropped from the Dividend Aristocrat list as well.

Sector overview

A sector breakdown of the Dividend Aristocrats index is shown below:

Source: Spindices

The top 3 sectors by weight in the Dividend Aristocrats are Consumer Staples (26.4%), Industrials (17.5%), and Health Care (13.2%). If we look at the weight of these sectors in the S&P 500 is shown below for comparison:

  •       Consumer Staples:  9.0%
  •       Industrials:  10.3%
  •       Health Care:  14.5%

That is not the only major difference; in fact the biggest sector by weight is IT which comprises 22.3% of the S&P 500, and just 1.9% of the Dividend Aristocrats Index. A breakdown of the S&P 500 is shown below:

Source: Spindices

How do you invest in them?

As you know, the easiest way is to buy an exchange traded fund (ETF) that matches the returns and characteristics of the S&P Dividend AristocratsTM Index. The ProShares S&P 500® Dividend Aristocrats ETF (NOBL) has tracked the S&P 500 Dividend Aristocrats Index since 2013, and is the only ETF that tracks this index.

If you still want to have a look at a more detailed analysis of each company, you can have a look at  Suredividends.

Other popular ETFs that mimic the S&P 500 Dividend Aristocrat index (but do not replicate it exactly) include the SPDR S&P Dividend (SDY) which tracks the S&P High Yield Dividend Aristocrats Index. The S&P High Yield Dividend Aristocrat Index is a different index than the S&P 500 Dividend Aristocrat Index because it tracks the S&P Composite 1500 index (3 times as many stocks than the S&P 500 index). Another difference is that the High Yield version contains stocks that have increased their dividends for at least 20 consecutive years (and not 25).