How to invest in dividend aristocrats

The effectiveness of the strategy, pros and cons, ways to optimize

Passive investors often build a portfolio with a focus on dividend income.

The attractiveness of dividend stocks seems obvious: if a company consistently pays dividends, it looks reliable. Also, such securities are usually less volatile.

Among dividend stocks there is a separate category – dividend aristocrats. These are companies that have been increasing dividend payments year after year for more than 25 years.

There are three other criteria that a company must meet in order to receive the title of aristocrat:

  1. Presence in the S&P 500 Index.
  2. Capitalization of $3 billion or more.
  3. The average daily trading volume on the paper of 5 billion dollars.

As I write this article, 64 companies fit the parameters of dividend aristocrats. S&P maintains an official list of them through the SPDAUDP index fund. Among the index’s long-livers are 3M, Coca-Cola, Colgate-Palmolive, Dover, Emerson Electric, Genuine Parts, Johnson & Johnson, and Procter & Gamble.

By and large, there is no magic here. We simply see a number of distinguished, mature companies that have the desire and ability to share profits with shareholders. And that speaks for itself. But let’s get into the nuances and see what kind of benefit investing in such companies brings in practice.

Dividend Kings

In addition to dividend aristocrats on the stock market, there are also dividend kings. These are the companies that have been raising dividends for the last 50 years. At the same time for dividend kings there are no requirements for capitalization, liquidity and presence in the S&P 500.

The 11 kings that did not make the dividend aristocrats index are Nordson Corp, Commerce Bancshares, Lancaster Colony, American States Water, California Water Service Group, ABM Industries, Stepan Co. Fuller, SJW Group, Farmers & Merchants Bancorp.

If you choose between kings and aristocrats, the latter look more reliable because of the additional capitalization and liquidity requirements. After all, the bigger the company, the more stable it is. Such companies have high credit ratings and are included in indices and portfolios of large funds. This is additional evidence of the reliability of the asset.

Historical returns

To estimate returns, I compared three indices: the S&P 500, the dividend aristocrat index, and the equilibrium S&P 500. The fact is that in the regular S&P 500, the weight of each company corresponds to its capitalization, while the dividend aristocrat index is equilibrium, that is, the shares are distributed in equal proportions. To eliminate the influence of this factor, in addition to the S&P 500, I added its equal-weighted counterpart for comparison.

It turns out that over a time horizon of 10 years or more, the Aristocrat index easily outperforms the normal and equilibrium S&P 500. Looking at a shorter time horizon, the Aristocrats were ahead throughout the period of economic growth, but the March collapse due to the coronavirus pandemic negated the gap. The S&P 500 Index eventually came out ahead, up 1.5% as of May 2020 and 8% by August. This was thanks to the tech giants, which hold more than 25% of the S&P 500: while the economy is in recession, the IT sector is showing strong growth. When compared to the equilibrium S&P 500, the aristocrats are the clear favorites.

6 U.S. companies that consistently pay dividends

Advantages of dividend aristocrats

Stable dividends and the ability to reinvest them triggers the compound interest effect. Historical data show that every dollar invested in the S&P 500 in 1930, without reinvesting dividends, would have yielded $115 by 2019. And with reinvestment, each dollar would have turned into $3,626.

Reliability. In order to pay and raise dividends for many years, a company must have high-quality management, high stability and a margin of safety. The same thesis is supported by credit ratings: the list of dividend aristocrats has a much higher proportion of companies with a rating of at least A- than the S&P 500.

Dividends above the market. Aristocrats combine returns from both the growth of the asset itself and from higher dividends. From 1999 to 2019, Aristocrats showed an average dividend yield of 2.5%, with a broad index figure of 1.8%.

Reduced volatility. This distinguishes dividend stocks from growth stocks. If a company can maintain a stable level of dividend payments, then during collapses this factor should keep quotations from a sharp fall: when the quotations fall, the dividend yield becomes too “tasty”, the shares are immediately repurchased.

But you can’t expect explosive growth of quotes, either. There will be no increased sentiment in such stocks like Tesla, no speculation and no shorting to drive the price up.

Still in the dividend aristocrat index is an increased concentration of non-cyclical securities: its largest share is in the defensive Consumer Staples sector, consumer staples.

Disadvantages of dividend aristocrats

The weaknesses I will cite are related in one way or another. In short, an aristocrat-only portfolio will have weak structure, diversification, and technological sophistication. Let’s look at this in more detail.

Weak portfolio structure. If we decompose dividend aristocrats by sector, here are which sectors get the most weight:

  1. Consumer Staples, the necessities of life, 22.2%.
  2. Industrials, industrial, 21.1%.
  3. Materials, raw materials, – 12.6%.

And this is which sectors have the most paltry share:

  1. IT, information technology – in particular Microsoft, the largest company by capitalization in the world.
  2. Communication Services, communications. This sector contains the media industry – with such giants as Google and Facebook.

From this, I conclude that the proportions of sectors are not optimal and do not correspond to the spirit of the times. Such a portfolio lacks technological sophistication. And it was the technology sectors that drove the index in the last business cycle.

Technological relevance. If we plan our portfolio for the strategic perspective of 10-20 years, then we need to bet on companies that will not lose their relevance in the new technological paradigm.

Since the first industrial revolution in the 18th century, humanity has gone through five successive technological cycles. Now we are at the beginning of the sixth, driven by bio- and nanotechnology, genetic engineering, artificial intelligence, and renewable energy.

In addition, the products of technology companies usually have a high added value, which provides the business with high margins. Already, two technology sectors – information technology and health care – together account for 40% of the capitalization of the S&P 500 Index.

The trend towards a new technology paradigm can be seen by examining changes in sectoral shares in the S&P 500 Index over the last business cycle.

The chart below shows the sectors that have lost weight. Mainly these are the raw materials sectors and those close to them: those providing products and services with low added value. The oil and gas sector has almost completely collapsed during this time. It is true that this is a specific market, living according to its own laws. Among other things, it has suffered from the onset of recession and the deflationary process. Therefore, most likely, oil and gas will recover adequate capitalization later, but, one way or another, the trend for decarbonization in the current century is laid.

Weights of S&P 500 2009/2020

Note: The sectoral structure of the index has changed over the past decade. The Communication Services and Real Estate sectors, which did not exist in 2009, have appeared. To account for the changes, the 2020 column has been adjusted:

  1. Added to the weight of the technology sector is the capitalization of Google and Facebook, which have been in Communication Services since 2018.
  2. Three percentage points were added to the financial sector – the weight of the Real Estate sector.
  3. Added to the cyclical Consumer Staples Secondary sector is the weight of media companies Disney, Comcast and Netflix, which have been counted as Communication Services since 2018.

All three sectors, which occupy the largest share of the dividend aristocrats’ portfolio, lost weight in the last business cycle. On the contrary, the IT sector, to which only 1.5% is allocated, grew exorbitantly.

All this means that in a long-term portfolio, in addition to good dividends, there must also be growing securities.

The life cycle of businesses. Companies are born, rise to their feet, reach their prime, and then grow old and die. Some become real long-livers – those that are able to take up the challenge of time, rebuild and move on with renewed vigor.

When an investor assembles a portfolio of dividend aristocrats, by and large he bets on the old guard. Yes, these are reliable and experienced players in the market, but for most of them the heyday is over. Businesses start generously sharing profits with shareholders when all means of further growth have been exhausted.

And vice versa, if a well-managed company has points of growth, it will join the race – direct profits to expansion, R&D, capital expenditures. In this case, the payment of dividends is an inefficient distribution of profits. And one of the main reasons is withholding taxes on dividends. For the U.S., this means that 30% of profits sent to shareholders will go to the government.

Therefore, it is preferable for an investor, provided that he directs his free capital to the stock, that profits remain within the growing company. If a company uses its financial leverage wisely, its performance will rise – and that will be reflected in the stock price. In that sense, the return from asset growth is much higher than the investor’s return from dividends.

It is also worth noting that there are different categories of investors. Some rely on passive income from their portfolios and need stable and continuous dividend payments. This can refer to people of retirement and pre-retirement age. In this case, a conservative approach and reliance on dividend companies is fully justified.

But a young investor who plans his portfolio for 20-30 years ahead and does not depend on receiving dividends at the moment, it is more advantageous to bet on growing companies. In a sense, these companies will grow old along with the investor. Over time, the explosive growth potential will be exhausted and they will move to a more generous dividend policy.

To sum up: dividend aristocrats are a great option if you need passive income here and now. If you’re willing to look ahead, however, you need to include growth assets in your portfolio.

Weak diversification. We have a list of 64 companies – such a number might seem like a good diversification of the portfolio. But if we look closely, we see that some sectors are too sparsely represented:

  1. There are three companies in the real estate sector: Essex Property, Federal Realty, and Realty Income.
  2. In the utility sector, there are two: Consolidated Edison and Atmos Energy.
  3. In the oil and gas sector, there are two: Chevron and Exxon.
  4. Communications is one: AT&T.
  5. Information Technology – one: Automatic Data Processing.

And many industries are not represented at all.

Portfolio turnover. History has not spared even dividend aristocrats. In the early 90’s there were 49 companies on the list. The period of the 90s in the U.S. is sometimes called “takeover mania”: the government then abolished legal restrictions protecting companies from aggressive takeovers. As a result, the markets began to redistribute power. Many mergers were toxic: a company often ate a competitor in order to take its best assets, and what was left was doomed to rot.

As a result, 24 aristocrats out of 49 did not survive the period and no longer exist. Two companies went bankrupt, in 22 cases there was a takeover. Investors received cash for their shares, shares of the takeover company, or a combination of these options. However, in 12 out of 22 cases it turned out to be an unsuccessful exchange for the investors.

Consider the history in the new millennium. As of 2005, the list of dividend aristocrats included 59 companies. 12 of them (20%) were absorbed by other players by 2020. Only 27 companies (45%) retained their aristocrat status, that is, they did not cut dividends during this time. In 2008, the crisis hit the banking sector hard, with Bank of America, Comerica, KeyCorp, Regions Financial, U.S. Bancorp on our list. Synovus Financial became an aristocrat in 2006, but it was not spared by the crisis either. In addition to financial institutions, payouts to shareholders were cut by General Electric – and they are still below 2007 levels.

Investments in any of these companies would have resulted in losses. It turns out that investors who bought shares to provide themselves with a permanent income in retirement lost both in dividend payments and capital: because at the same time the quotes collapsed.

An investor can’t just buy shares of dividend aristocrats and forget about them. At the very least, you have to keep your finger on the pulse and follow the key news. Although there is compensation for investors in takeovers, this procedure can be complicated and costly, so it is better to be able to exit the position in advance.

If you want to avoid all that and really only “buy and hold,” the best option for investing in dividend aristocrats would be an exchange-traded investment fund.

Investing in aristocrats through ETFs

In 2013, the ProShares S&P 500 Dividend Aristocrats exchange-traded investment fund with the ticker symbol NOBL appeared on the market. The management fee is 0.35%. The fund is rebalanced on a quarterly basis.

Here are the key indicators of the fund as of March 31, 2020:

  1. The number of companies is 64.
  2. The average capitalization is $60.47 billion.
  3. P / E – 15.75.
  4. P / B – 2.77.
  5. The dividend yield is 3.15%.

Also at the end of 2019, the NOBL ETF has a higher ROE, return on equity: 19.1% versus 15.3% for the broad index.

I wrote about what P/E, P/B and ROE are in an article about primary stock analysis. Let’s look at how the NOBL ETF has performed since its launch on October 9, 2013.

The S&P 500 performed 3.7% better than the dividend aristocrats. This can be explained by the presence of tech giants in it, some of which even made new all-time highs during this period of collapse. Source: ProShares S&P 500 Dividend Aristocrats ETF

If your broker does not provide access to this instrument, you can buy 64 shares of dividend aristocrats yourself in equal shares, copying the ETF NOBL. Personally, that’s what I do: I try not to buy ETFs, I just focus on them. First, with this option, you can save on management fees. Secondly, it is possible not to add a stock to the portfolio if it does not suit for some reason.

This method assumes that you have to analyze your portfolio yourself at least once a quarter – and close your position as soon as the company loses its aristocratic status or news comes out related to a merger, takeover or possible bankruptcy. If an investor wants to invest and forget for 10-20 years, then ETFs are the best option.

There are other ETFs on dividend aristocrats – and on companies that just steadily raise dividends.

ProShares S&P Technology Dividend Aristocrats ETF (TDV). A very young fund, launched in November 2019. It follows the S&P Technology Dividend Aristocrats Index and is also equilibrium. The management fee is 0.45%.

Trying to combine technology stocks and dividends is still a relatively new phenomenon in the market. The requirement for inclusion in this ETF is less stringent: the company must have been increasing dividends for at least 7 years.

The index includes IBM, Apple and Microsoft.

ProShares S&P MidCap 400 Dividend Aristocrats ETF (REGL). A mid-cap dividend companies ETF. It follows the S&P MidCap 400 Dividend Aristocrats Index, with a management fee of 0.4%. The minimum payout increase period for inclusion in the fund is 15 years. The list consists of 53 companies.

The ETF may be suitable for investors who want passive income from mid-cap players. This option combines a stable dividend flow and the growth potential of companies.

SPDR S&P Dividend ETF (SDY). This fund is much older than the NOBL ETF: it started at the end of 2005. It follows the S&P High Yield Dividend Aristocrats index. The requirement in this index is to raise dividends for at least 20 consecutive years.

Thus, the threshold for entering the fund is lower, which is why it has 120 representatives – almost twice as many as NOBL. Both indices are equally weighted. The management fee is 0.35%. The average dividend yield is 3.6%.

SPDR S&P Global Dividend ETF (WDIV). This is a global ETF including companies from 19 countries. The fund follows the S&P Global Dividend Aristocrats Index. The index is equally weighted. The commission is 0.4%.

About 45% of the representatives belong to developed markets, such as the U.S., Canada and France, which may speak of reliability.

How to optimize the strategy

So, if you invest through funds, you can solve the problem of aristocrat list fluidity and get rid of the need to actively manage your portfolio.

And the disadvantages associated with a weak technology portfolio of aristocrats are corrected by adding a growing portion to the portfolio. This could be individual technology companies, industry-specific or sector-specific ETFs.

For example, let’s form a portfolio: 80% will give aristocrats – NOBL, and 20% will invest in the technology sector – ETF Technology Select Sector SPDR (XLK).

Let’s see what would have happened if we had invested $10,000 in such a portfolio in 2014, and compare it to investing only in aristocrats or only in the S&P 500.

Such a portfolio would bring us about $1,000 more than the S&P 500, and $2,413 more than just dividend aristocrats. In a rising market it outperforms its competitors, in a falling market it performs better than NOBL. The average annual return on the 80/20 portfolio was 10.4%.


the average annual return of the portfolio assembled by the 80/20 strategy

Invested $10,000 in 2014: aristocrats only, S&P 500 only, 80/20

ResultPer yearBest yearWorst Year
NOBL16 295 $8,01%26,94%−15,35%
S&P 50017 774 $9,51%31,33%−9,34%
80/2018 708 $10,4%32,38%−11,16%

In 2018, the 80/20 portfolio drawdown was the smallest. And only in the current crisis has it sagged more than the broad index. If we had created a more complex structure and we had a couple of percent each of Amazon, Google, Facebook in our portfolio, we would have beaten the S&P 500 in that parameter as well


  1. Dividend aristocrats beat the index over 10 years – with less volatility.
  2. The list of dividend aristocrats is volatile. That’s why the NOBL ETF is great for passive investing. But consider the management fee. It is also possible to build such a portfolio manually.
  3. The Aristocrat Index has a weak sector structure and lacks diversification. The technology sectors, mainly IT, are underweight. With an increase in its share, the portfolio becomes much more efficient.
  4. If you plan your portfolio for the long term and do not depend on dividend payments in the moment, then betting on growing stocks is more promising. Reinvesting profits within the company is more profitable than distributing them among shareholders.
  5. Emphasis on dividend aristocrats is worth doing when you need passive income in the here and now.
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