Investing in stocks for current income can be an excellent strategy. Investors looking for income will often look for companies with high dividend yields, where the dividends are a large percentage of the share price. However, this can be risky. A high yield may indicate a company that has a problem; as the stock price has gone down due to selling, the dividend yield has gone up. Companies with artificially high yields may not keep paying out dividends at the same level. Depending on an investor’s timeframe and goals, it might be better to look at companies that routinely increase their dividends.
A company that has routinely increased its dividends over time has demonstrated both the ability to increase earnings and the desire to share those earnings to shareholders in the form of dividends. Companies that consistently increase earnings over the long run are considered to be among the best run and often make excellent investments.
Investors interested in this type of company should look at the Standard and Poor’s Dividend Aristocrat list. These are companies that have the following characteristics:
- Be a member of the S&P 500, a group of 500 of the largest companies on U.S. stock exchanges and
- Have increased their dividends for at least the last 25 years.
Companies that have spent a quarter century growing their dividends have demonstrated the ability to grow their earnings over that time as well. Furthermore, after finally becoming a Dividend Aristocrat, most companies are not eager to give up the designation and will continue to increase their dividends as long as they are able to. Because of this, they are candidates for some of the best dividend stocks that are available.
And the power of compounding can be tremendous. If a company increases their dividend by only, for example 6% each year (some do more than that), then the dividend payout will double every 12 years and quadruple every 24 years. Over the long term, this can provide a powerful income stream, particularly if the early dividends are reinvested in more shares.
Of the 500 companies in the S&P 500, currently only 54 (about 10%) qualify as S&P Dividend Aristocrats. These include health care giant Johnson & Johnson, retailers Walmart and Target, and manufacturers of consumer goods like Colgate-Palmolive, Kimberly-Clark, Clorox, and Procter & Gamble. The complete list of all 54 Dividend Aristocrats is available.
Standard & Poor’s maintains the official list of Dividend Aristocrats. Investors looking at the list of 54 companies should note that one of the companies, AbbVie, was spun off from Abbott Laboratories at the beginning of 2013. By the rules that S&P uses for spinoffs, AbbVie inherited the dividend history of Abbott Labs, making it a one-year-old company with a 25-year dividend history. Prudent investors should do research before putting their hard earned money to work.
The S&P Dividend Aristocrats make up a select group of companies that have been able to increase their dividends, and hence their earnings, for at least a quarter century. While there is no guarantee that they will continue to increase their dividends, these companies make an excellent starting point for investors looking for current income and long-term growth potential and can be some of the best dividend stocks out there.