Individual investors who want income from their investments have many options when it comes to finding places to put their money. There are countless different types of income stocks from Master Limited Partnerships (MLPs), Real Estate Investment Trusts (REITs), consumer staples, consumer cyclicals, technology, and the list goes on. This means investors can undoubtedly find stocks that will help them meet their investment objectives, but it can also mean that finding the right place to put their money can be difficult.
We think the best place to start when finding investments for a secure retirement is the group of stocks with the longest dividend increase streaks. This means not only that they pay good dividends, but that they have a long record of doing this year after year. These companies offer certain attributes that make them attractive to income investors, and we see them as the most reliable path to building wealth for retirement.
Perhaps the best-known group of durable dividend stocks is the Dividend Aristocrats. The Dividend Aristocrats are among the highest-quality dividend stocks that can help investors secure their own retirement.
What Are Dividend Aristocrats?
Dividend Aristocrats are stocks that have certain criteria that set them apart from the sea of lesser dividend-paying stocks in the market today. In order to make the cut to be a Dividend Aristocrat, a stock has to be a member of the S&P 500 index, so right off the bat, these are some of the largest stocks by market capitalization in the market.
Second, and most importantly, these companies must have increased their dividend payments to common shareholders for at least 25 consecutive years. This kind of dividend increase streak is extremely difficult to achieve given all the varying economic conditions that can arise during such a lengthy period, which is why there are currently only 65 Dividend Aristocrats in the entire stock market.
Therefore, this group of 65 quality dividend payers is a terrific starting point when it comes to finding an investor’s next dividend stock purchase. The Dividend Aristocrats offer many benefits to investors, particularly income investors such as retirees, which we’ll examine below. You can download an up-to-date free list of the Dividend Aristocrats here.
Why Invest In The Dividend Aristocrats?
Stocks that have become Dividend Aristocrats have special attributes that make them very attractive to those who are trying to invest for their retirement. First, any company that can increase their dividend to shareholders for 25 consecutive years must have a sustainable competitive advantage. After all, an increasing dividend payment requires ever-higher earnings over time. Any company that has made the list, by definition, must have some kind of advantage over others in its field, or it wouldn’t have been able to raise the payout for so many years consecutively.
During periods of economic weakness, this competitive advantage generally strengthens because lesser companies in the same industry either lose market share or disappear during recessionary periods, such as the Great Recession. Companies that were able to generate enough profits to continue to raise their payouts during such a tumultuous period are generally in a better spot competitively coming out of recessions than they were going in.
Second, Dividend Aristocrats have management teams that have not only the ability to pay a rising dividend for long periods of time, but the desire to do so as well. There are many businesses that could pay dividends to shareholders, but choose to use that money on acquisitions, share repurchases, or just to save it. Dividend Aristocrats have made the choice to make returning cash to shareholders a top priority, which is key, particularly during economic downturns.
These characteristics necessarily exclude companies that have very unreliable earnings and cash flows, as well as those that have no earnings at all. These types of companies include recent IPOs, early-stage growth companies, and extremely cyclical businesses that tend to lose money during periods of economic weakness. What’s left after these exclusions are just the highest quality stocks available in the market, which is why we think the Dividend Aristocrats are such a great place to start the search for a dividend stock to buy.
It is worth noting as well, that Dividend Aristocrats have proven to shareholders over time that they are efficient allocators of capital. Many companies that do not pay dividends throw their cash around to try to generate growth, which can include expensive or ill-timed acquisitions. By contrast, Dividend Aristocrats have proven the ability over the long-term, and through a variety of economic conditions, that they can invest for growth and pay out cash to shareholders without undue stress on the company’s financials. Like a durable competitive advantage, this characteristic makes owning Dividend Aristocrats safer than the average non-dividend paying stock.
Putting all of these characteristics together, we have a group of stocks that are, on average, higher quality businesses than those that don’t pay dividends, and also than those that are forced to cut their distributions during recessions.
To that end, the Dividend Aristocrats have outperformed the broader market over time, which makes sense considering how well positioned they are in their respective fields. That means that not only do these stocks weather recessions and keep raising their payouts, but they generally do so with less volatility.
For instance, during the 2008 Great Recession, the S&P 500 declined 38%. Meanwhile, the Dividend Aristocrats declined only 22% during that same year, highlighting the strength these companies show during tough economic periods. This drawdown protection can make the Dividend Aristocrats particularly enticing for investors relying upon their dividend income for living expenses, such as retirees.
The Dividend Aristocrats as a group tend to be less volatile than the broader market during most periods, but this is especially true during periods of selling. And considering that the Dividend Aristocrats offer better total returns over time than the S&P 500 under most conditions, the group is especially attractive for income-focused investors like retirees.
Summing Up Dividend Aristocrats Benefits
The Dividend Aristocrats as a group offer investors access to some of the highest-quality businesses in the stock market. These companies have stood the test of time in a competitive sense, in addition to weathering recessions, as well as having management teams that are willing and able to pay rising amounts of cash to shareholders over time.
These stocks offer investors strong returns compared to the broader market, and do so with less volatility. The constantly rising dividend payments the Aristocrats offer afford investors the ability to compound wealth over time by reinvesting dividends into high-quality businesses. Given these traits, we and many others see the Dividend Aristocrats as a preferred group of companies in the stock market to secure an investor’s retirement portfolios.
This article was written by Bob Ciura, Senior Vice President at Sure Dividend, at the request of Better Life Hub. Sure Dividend provides extensive information about dividend investing, Dividend Aristocrats and other valuable investment options. This article is for informational purposes only and is not investment advice. Past performance is no guarantee of future results. Sure Dividend is an investment newsletter provider, and provides investment information, not personalized investment advice.