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Sunday, March 30, 2014

Dividend Aristocrats

real aristocrats
Dividend aristocrats have increased their dividends each year for the past 25 years.  There are presently 51 aristocrats in the S&P 500.  Here are the first 10 dividend aristocrats shown with ticker symbol, dividend yield, and P/E ratio.  The P/E ratio is based on the trailing twelve-month earnings:

MMM     2.60%     19.95
AFL        2.30%      9.31
ABT        2.30%     23.66
APD        2.50%     25.56
ADM       2.32%    21.00
 T            5.40%     10.24
ADP        2.50%    26.26
BCR        0.60%    17.27
BDX        1.90%    24.15
BMS        2.80%    18.65

A complete list can be found at

S&P 500 Dividend Aristocrats .

The yields and P/E ratios were obtained at

Yahoo! Finance  (just put ticker symbol into quote box )

The reader will  note that the issues are a bit pricey.  For comparison purposes, the weighted P/E on the overall S&P 500 is 19.63.  The fact that  many aristocrats have a higher P/E reflects their solid performance.

To see this go to the useful site at

S&P Dow Jones Indices

Source: S&P
 Here you can see that the aristocrats achieved a 5-year annualized return of 23.23% versus 20.43% on the overall S&P 500.

If you do the same exercise for the 1-year period ended 3/28, you'll find the aristocrats underperformed, 17.65% versus 20.89%.

These results point up an important point regarding investment approaches:  there is no single "no brainer" approach to investing.  This is important to keep in mind today because you'll see articles that tout dividend investing as an approach that always outperforms.

Investment Approaches

As an advisor, I talk to a lot of people about how to go about investing.  I understand that many people have difficulty relating to the typical approach that sets up a benchmark and then constructs a portfolio that seeks to outperform a benchmark they are not familiar with.  Many times there is the unasked background question concerning the performance of the benchmark:  what if it gets hammered?

Then there is the investment approach du jour:  manage to meet goals.  With this approach, portfolios are constructed differently for those seeking to finance a college education, leave an inheritance, or meet basic retirement needs.  To me, this approach is a bit wishy-washy and enables investment managers considerable leeway to produce poor performance.

Another way is suggested with the dividend approach and is welcomed by not only those in or near retirement but also the young.  The dividend investing approach has the goal of creating  passive income, and passive income is what you need in retiring - either early or normally.

I find that those who have dabbled in real estate relate to this way of viewing investing.

From the perspective of dividend aristocrats, the passive income approach is especially attractive in that dividends are consistently increased.  Consider this:  the yield on the 10-year Treasury note is 2.70%; and, if bought today, is locked in for the next 10 years.  Look back at the list above, and you'll find issues with yields above 2.70%.  If bought today and dividends are increased, yield at cost can rise significantly!

Think about the dividend approach like this:  suppose you had a basic annuity with an insurance company whereby you pay them a certain amount and they pay you a specified amount for as long as you live.  This is known as a single premium immediate pay annuity (the income stream is similar to Social Security).  Once you make the payment, there is no underlying value to worry about.  Similarly, in  investing in a portfolio  of dividend stocks, you can ignore the underlying value of the portfolio.  If it goes up, it can be considered gravy; but what you really care about is the income stream.


Like all investors, the dividend investor should diversify.  Buy Pfizer or Merck - don't buy both.  Buy AT&T or Verizon - don't buy both.  In 2008, the non-diversifier could have easily gotten hammered by the finance sector--caveat emptor.  The big risk in dividend investing is that dividends will be decreased!

Dividend stocks are in competition with the bond market.  They are substitutes for the marginal investor.  A sharp rise in interest rates would likely cause a greater discrepancy in performance between dividend stocks and non-dividend stocks than noted in the 1-year performance results reported above.

Creating a strong portfolio of dividend paying stocks requires some research and understanding that higher yields means greater risk.

Disclosure:  I hold stocks mentioned above for myself and for clients.  This post is for educational purposes.  Investors should do their own research or consult a professional before making investment decisions.

1 comment:

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