In recent years, passive investing has grown in popularity as more and more investors choose a low-cost, low-maintenance strategy for accumulating cash flow. Buying shares of companies that pay out dividends is one well-liked investment approach to increase passive income. One simply dividend strategy I like to incorporate into my investment strategy are investing in the S&P Dividend Aristocrats.  In this article, we’ll explain what the S&P Dividend Aristocrat stocks are, discuss the benefits and drawbacks of buying them, and explain why you should include them in your passive investment plan.

Why Standard and Poor’s (S&P) created the S&P Dividend Aristocrats

According to S&P, over the past 80 years, dividends have accounted for over 1/3 of the total return of the S&P500.  S&P has designed its Dividend Aristocrats index to isolate quality dividend growers in order to minimize risk, maximizing return, and provide predictable cash flow even during market volatility.

What is the criteria S&P uses for companies to be included in the S&P Dividend Aristocrats

The criteria S&P uses for membership of the index include the following:

• Universe: Be a member of the S&P500
• Selection: Have increased total dividend per share amount every year for at least 25 consecutive years
• Market Cap: Have a minimum float-adjusted market capitalization of at least $3B
• Liquidity: Have an average daily value traded of at least $5M for the past 3-months
• Diversification: The minimum number of constituents should be 40. Further, using the Global Industry Classification Standard (GICS), the index should not result in a GICS sector accounting for more than 30% of the index weight.

What is the sector breakdown of the S&P Dividend Aristocrats

S&P keeps track of the list of dividend aristocrats. From the information we can gather, there are 67 dividend aristocrat stocks as of 2022. This index includes recognizable name such as Coca-Cola (KO), Procter & Gamble (PG), and Johnson & Johnson (JNJ). The index also represents a range of different industries, including consumer products, healthcare, and industrials.  Since the index is equal weighted, it eliminates the single stock concentration.  Below we illustrate the sector breakdown of the index.

Which stocks are included in the S&P Dividend Aristocrats

Based on the data we have collected, the following are the stocks that make up the S&P Dividend Aristocrats, along with their respective dividend yield.  So for example, 3M Company (MMM) has a dividend yield of 5.65%.  Thus, if you invested $1,000 in MMM stock, the annual amount you would receive in dividends would be $56.50,. This assumes there is no changes to MMM’s dividend policy.

Pros of Investing in the S&P Dividend Aristocrat Stocks

There are several advantages to investing in dividend aristocrat stocks as part of a passive investment strategy. Below we list 4 advantages.

1. Reliable And Predictable Income Stream

One of the most significant benefits of investing in the S&P Dividend Aristocrats is the reliable income stream. These companies have a historic track record of paying out dividends and increasing those dividends for at least 25 consecutive years. This makes them an attractive investment for investors who are looking for a consistent source of income from their investments.  However, although they have a proven track record, its important to bar in mind that dividends could change.  For example, AT&T (T) was a stock that used to be on the list, but was removed after cutting its dividend from the result of spinning off Warner Bros.

2. Lower Risk

The S&P Dividend Aristocrats tend to be less volatile than other stocks. These companies have a long history of financial stability and consistent dividend payments, which makes them a lower-risk investment option. This is particularly important for investors who are risk-averse or who are looking for a more conservative investment strategy.  According to an S&P report, the index has outperformed the S&P 500 69.29% of the time in down months. As well as outperformed the S&P 500 43.43% of the time in up months.

3. Long-Term Growth Potential

The S&P Dividend Aristocrats may not have the same high return potential as other investments, such tech stocks. However, it does have the potential for long-term growth. These companies have a track record of stability, robust cash flow, and steady development. This indicates they might keep performing well if they maintain the same level of discipline.

4. Inflation Protection

The S&P Dividend Aristocrats can also provide protection against inflation. As the cost of living increases over time, the dividend payments from these companies also tend to increase. This means that investors can maintain the purchasing power of their investment over time, even as the value of money decreases.  According to Proshares, as a group, the S&P Dividend Aristocrats have grown their dividends by 8% annually since 2006.

Cons of Investing in the S&P Dividend Aristocrats

While buying the S&P Dividend Aristocrats have several advantages, there are also several disadvantages to take into account. Here are a few drawbacks I think every investor should be aware of.

1. Lower Yield and limited growth potential

The S&P Dividend Aristocrats tend to offer lower yields than other types of investments such as real estate or peer-to-peer lending. For instance, if you look at the list we provided in this article, the dividend yield ranges between 0.2%-5.6% This is because these companies prioritize consistent dividend payments and long-term growth over high yields. While this can be an advantage for investors looking for a more stable investment option, it may not be ideal for risk-tolerable investors looking for higher returns.

2. Sector Concentration 

Another potential drawback of investing in the S&P Dividend Aristocrats is that the companies on the list can be heavily concentrated in certain sectors.  Reviewing our pie chart above, ~48% of the list comprises of Consumer Staples and Industrials. This means that investors who focus on dividend aristocrats may have an unbalanced portfolio with overexposure to these sectors. This concentration can increase the risk of sector-specific events impacting the entire portfolio.

3. Dividend Cuts

While dividend aristocrat stocks have a long history of increasing their dividends, there is always a risk that a company may cut its dividend. This can happen due to changes in the company’s financial situation or industry-specific challenges. If a company cuts its dividend, it can significantly impact the income stream for investors who rely on these payments.  For example, AT&T (T) was a stock that used to be on this list, but the company cut its dividend from the result of spinning off Warner Bros.

How to Invest in Dividend Aristocrat Stocks

If you’re interested in investing in dividend aristocrat stocks as part of your passive investment strategy, below are a few things to keep in mind:

1. Do Your Research: Before investing in any stock, it’s important to do your research and understand the company’s financial situation, growth potential, and dividend history. This will help you to make informed investment decisions and minimize your risk.
2. Consider a Diversified Portfolio:  To reduce your overall portfolio risk and avoid overexposure to certain sectors, consider investing in a diversified portfolio of dividend aristocrat stocks across different industries.
3. Reinvest Your Dividends:  If you’re investing for long-term growth, consider reinvesting your dividend payments back into the stock. This can help to increase your overall returns over time.
4. Be Patient:  Investing in dividend aristocrat stocks is a long-term strategy, and it’s important to be patient and stick with your investment plan even during market downturns or periods of volatility.

Overall, dividend stocks may be a useful addition to a passive investment plan. These businesses provide a steady revenue stream, the possibility for long-term growth, and inflation insurance. While purchasing these companies may have some disadvantages, such as lower yields and constrained growth potential, you can mitigate these by diversifying your portfolio and adopting a long-term investing strategy. You may create a sound investment strategy that incorporates dividend aristocrat stocks by conducting thorough research, taking into account a diverse portfolio, and exercising patience.

Live Well,

-Blue