Why Dividend Aristocrats are a Good Place to Find Income

In 2008, at the depths of the worst recession since the Great Depression, the Federal Reserve reduced short-term interest rates to basically zero to help stop the bleeding. The U.S. economy recovered nicely since that tourniquet was applied. But seven years later, short-term interest rates remain near zero.

That means the traditional avenues for earning interest on the money you save— certificates of deposit, Treasury bonds and money-market accounts—have been all but cut off. Income seekers hoping to save for retirement have had to turn elsewhere. The most logical place is dividend stocks.

As investors have gone hunting for dividend-paying stocks in recent years, more and more companies have initiated a dividend. Currently 421 of the companies that comprise the S&P 500 pay a dividend, the highest number since the turn of the century. But don’t let the high participation rate fool you. Not all dividend stocks are created equal.

Though 84% of all large-cap stocks now pay a dividend, the payouts aren’t particularly generous. The average yield among S&P 500 stocks is a mere 1.9%, roughly in line with the 10-year median. Meanwhile, the payout ratio among S&P 500 companies is 32%, only a few percentage points higher than the 10-year average (29%).

Some companies want to dangle the carrot of a dividend to attract more investors without really rewarding those shareholders in a meaningful way. A 0.8% yield technically makes a company a dividend payer, but it’s not an amount that should entice you to buy the stock. Other companies may offer eye-popping yields—6%! 7%!— that aren’t sustainable because the company simply isn’t making enough money.

Those are dividend stocks you should avoid.

Rather, you should consider companies that have not only been paying dividends for decades, but have also annually increased those payouts. These are called “Dividend Aristocrats.”

Dividend Aristocrats are companies that have increased their dividends at least once per year, every year, for at least 25 straight years. That kind of dividend growth demonstrates two things: stable cash flow and a commitment to rewarding shareholders. Better yet, most Dividend Aristocrats offer generous yields, typically in the 3% to 4% range—much higher than the 1.9% yield you’d receive from the “average” dividend stock.

When you invest in a Dividend Aristocrat, you not only count on receiving a quarterly dividend payment, but you can also rely on those payouts increasing every year.

Say you buy shares of Procter & Gamble (PG), a company that has upped its dividend payout for 58 consecutive years. Through the dot-com bubble bursting at the turn of the century, the Great Recession of 2008–2009, the European debt crisis volatility that plagued U.S. markets in 2011, P&G has increased its dividend every year.

The 3% dividend yield P&G offers today isn’t much different from what it was five years ago, 10 years ago or 25 years ago. The certainty of a 3% yield is a nice buffer against market volatility and sudden crashes like we saw during the recession. It’s even better knowing that your quarterly payouts will increase every year.

Dividend Aristocrats aren’t a super-exclusive group. After all, roughly a quarter of the 421 dividend payers in the S&P 500 qualify as Dividend Aristocrats.

Most Dividend Aristocrats you already know. They are blue-chip companies known for being reliable and shareholder friendly. Those include:


  • McDonald’s (MCD): 44 straight years of dividend growth
  • Johnson & Johnson (JNJ): 58 years
  • CocaCola (KO): 58 years
  • WalMart (WMT): 46 years
  • Exxon Mobil (XOM): 38 years

Others are less obvious. For example, the longest-tenured Dividend Aristocrat is

Deibold (DBD), with 67 straight years of dividend growth.

Regardless, most Dividend Aristocrats are large, relatively stable blue-chip companies with healthy balance sheets. They can afford to not only reward shareholders, but to increase those rewards every year.

Not all Dividend Aristocrats have staying power. After the financial crisis, a number of brand-name companies ordinarily associated with dividend stability suddenly cut their payouts or dropped them altogether. Bank of America (BAC) was one example.

But those types of catastrophic situations are rare. And besides, when a company stops increasing its dividend annually, it is simply cut from the Dividend Aristocrats list.

You can find the full list of Dividend Aristocrats online by visiting the Standard & Poor’s Dividend Aristocrats page. Just note that the list does fluctuate a bit from year to year, as companies either hit the 25-year dividend growth mark or (in those rare cases) elect to stop increasing their dividend.

Knowing where to find Dividend Aristocrats, and how to invest in them, is easy. Understanding why you should invest in them is even easier.

In an age when storing your money in a high-interest-bearing CD or money market account has become essentially worthless, Dividend Aristocrats are reliable alternatives.

The yields are better than your average dividend stock; the share prices are fairly predictable, appreciating slower than the market but rarely falling too far during corrections; and best of all, the dividend payments you receive are likely to grow every year.


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