Dividend Aristocrats
Forever Dividends
Many people seeking financial freedom find dividend stocks attractive as a way to gradually replace their income. But how do you identify them? Well, there are the Dividend Aristocrats, which is an elite group of US companies that have increased their dividends every year for at least the last 25 years. More on this below.
However, some see dividend stocks as a boring investment option, inferior to exciting growth stocks. That may be true, but it doesn't have to be. If you had bought Exxon stock in 2020, you would now have a dividend yield (based on your initial investment) of about 10%, growing every year. That doesn't sound boring. Does it?
What's more, by reinvesting dividends, investors can create a self-sustaining portfolio that grows over time without additional capital contributions. The compounding effect of reinvested dividends can significantly increase total returns, allowing investors to build wealth more effectively. In addition, qualified dividends are taxed at lower rates than ordinary income, making them an efficient way to generate income.
In addition, dividends can serve as a hedge against inflation. Historically, dividend growth in the S&P 500 has often outpaced inflation, helping investors preserve their purchasing power over time. For retirees, dividend stocks provide a reliable stream of income that can help cover living expenses without the need to sell stocks or dip into investments. This steady cash flow can be critical to maintaining financial security in retirement.
For prepared investors, reliable dividend-paying companies can be quite lucrative as part of their overall investment portfolio, as the following Exxon Deep Dive shows.
“Boring” Dividend Companies that Made Investors a Fortune
Exxon, the oil giant, increased dividends throughout the COVID pandemic, while many other companies slashed or suspended their payouts. For instance, in 2019, Exxon paid annual dividends of around $3.5 per share, slightly increasing each year from 2019 to 2023—continuing this trend through the pandemic and beyond.
Exxon Mobile Annual Dividend History 2019 to 2023
Source: https://finbox.com/NYSE:XOM/dividends/
Each share of Exxon provides investors with approximately $3.5 in dividends per year. If you hold 10,000 shares of Exxon, that translates to about $35,000 in dividend payments annually. You might think, "10,000 Exxon shares is a lot of money." Well, yes and no. With the exception of the drop during the pandemic, in the past few years, the price for Exxon shares has, on average, been hovering around $100 per share. Therefore, owning 10,000 shares at $100 would typically cost about $1 million—not cheap. However, during the COVID pandemic, Exxon was on sale; at that time, 10,000 shares would have cost roughly $320,000 since the stock price dropped to about $32 per share.
That means, in normal times, an investor would need to pay about $1 million to get an annual & growing dividend stream of $35,000 per year, which is a dividend yield of roughly 3.5%. However, any investor who bought them while they were on sale during the COVID pandemic only had to pay $320,000 to get an annual & growing dividend stream of $35,000 per year, which is an exceptional dividend yield of roughly 11.0%. In addition, the same investor would have experienced a huge capital appreciation, with the value of his stock increasing from $320,000 to approximately $1 million after the pandemic ended.
Exxon Share Prices 1970 to 2024
Source: https://stockanalysis.com/stocks/xom/
As the old saying goes, "Chance favors the prepared mind," meaning that success often comes to those who are ready and equipped to seize opportunities when they arise. If you had already been aware that Exxon was a member of the elite Dividend Aristocrat list and had done your homework, you could have pounced on that.
Well, too late for that opportunity. But not too late for the next opportunity.
So, who are these elite companies of Dividends Aristocrats?
Dividend Aristocrats - An Elite Club of Great Companies
A lot of smart people spend a lot of time identifying great dividend companies. There are many one-hit wonders. Great dividends for a few years, but then nothing, with a collapsing stock price to follow when the dividend stops. So who is reliable?
There is a short-cut. If you want reliable companies with a 25-year track record, there is no better source than the S&P Dividend Aristocrats Index. Let’s talk about S&P for a moment. S&P, short for Standard & Poor’s, is one of the two global rating agency giants that assign credit ratings to debt issued by companies and countries. Just for your information, the other global rating agency giant is Moody’s. Both companies play a critical role in the world of global finance.
S&P makes this easy with the S&P 500 Dividend Aristocrats Index. To qualify for inclusion in this index, a company must be a member of the S&P 500 and must have increased its dividends every year for the last 25 consecutive years. Now, what does that mean?
S&P 500 Member: Being a company listed in the S&P 500 means that it is part of a prestigious stock market index that tracks the performance of 500 of the largest publicly traded companies in the United States.
Increased Dividends Every Year for 25 Consecutive Years: No one knows the future, but as they say, “history is the best predictor of the future.” For a company to have achieved this through good years and bad shows an incredible commitment to paying dividends.
But why are some companies so committed to paying companies, through good times and bad times, when others are not?
Why Do Some Companies Move Heaven and Hell to Pay Dividends?
Perception is rarely reality. One might assume that as the CEO of a company, they can run it as they see fit. While this can be true, it often isn’t the case. The ultimate authority over a public company lies with its board of directors. If the board generally defers to the CEO, then the CEO has more freedom to manage the company according to their vision.
However, if an activist investor acquires enough shares to gain a seat on the board because they believe the company is mismanaged, it complicates the CEO's role. When the board includes activist investors who see themselves—rightly or wrongly—as super-CEOs with better insights on running the company, the CEO must navigate their influence.
Having a significant portion of the shareholder base comprised of dividend investors makes it easier for the CEO to operate with greater autonomy. These investors are primarily interested in stable, growing dividends.
Additionally, a large base of dividend-focused investors means fewer shares are available for potential hostile takeovers, alleviating another concern for CEOs. Again, having investors focused on stable and growing dividends allows the CEO to manage the company more freely.
In fact, dividend shareholders can be so crucial to companies that some will borrow money in challenging years to maintain their reliable dividend payouts. For example, ExxonMobil famously borrowed funds during COVID to ensure they could pay increased dividends to shareholders despite plummeting revenues and falling stock prices during that period.
Source: https://www.foxbusiness.com/markets/coronavirus-oil-exxon-mobil-dividend-delivers
Source: https://finance.yahoo.com/news/exxon-mobil-preserving-dividend-may-172925100.html
So, given all this, who are the members of this exclusive club - the S&P Dividend Aristocrats?
S&P Dividend Aristocrat Members - An Elite Club
The S&P Dividend Aristocrats Index has 66 members. The top 10 members by index weight are Emerson Electric (EMR), Cincinnati Financial Corp (CINF), Albemarle Corp (ALB), Franklin Resources Inc (BEN), Genuine Parts Co (GPC), Dover Corp (DOV), Walmart (WMT), W.W. Grainger Inc (GWW), T Rowe Price Group (TROW), and Fastenal Co (FAST).
Source: https://www.spglobal.com/spdji/en/indices/dividends-factors/sp-500-dividend-aristocrats/
S&P, at least on its non-member public site, does not publish the full list of members. However, there are workarounds. The ProShares S&P 500 Dividend Aristocrats ETF (NOBL) focuses exclusively on the S&P 500 Dividend Aristocrats, and they do publish the full membership list, which can be found here: https://www.proshares.com/our-etfs/strategic/nobl.
There is also a Wikipedia page on the Aristocrat members. However, like all Wikipedia pages, it should be taken with a grain of salt: https://en.wikipedia.org/wiki/S&P_500_Dividend_Aristocrats.
Even at current non-crisis prices, some dividend aristocrats are paying good dividends.
The top 5 Dividend Aristocrats by dividend yield are:
5.99% Dividend Yield, Franklin Resources, Inc. (BEN)
5.74% Dividend Yield, Realty Income Corporation (O)
5.28% Dividend Yield, Amcor plc (AMCR)
4.41% Dividend Yield, Chevron Corporation (CVX)
4.19% Dividend Yield, T. Rowe Price Group, Inc. (TROW)
Source: https://www.nerdwallet.com/article/investing/top-dividend-aristocrats-list
Summary
In my opinion, dividend-paying companies should be a part of every investment portfolio. The percentage allocation will depend on an individual's life situation, life plan, and age.
However, having a list of reliable dividend companies that you want to own at the right price can lead to significant returns. For example, if you had purchased Exxon during the COVID pandemic, those shares would yield around 10% based on the purchase price, with dividends growing each year. Not many great companies like Exxon offer that kind of yield. Conversely, if you buy them now, your dividend yield would be closer to 3%, which is still decent but not as exciting as 10%.
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Disclaimer
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Past performance of stocks and assets is not an indicator or guarantee of future performance of stocks and assets.
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