The Dividend Aristocrats:  What They Are and Why They Matter

There are various broad styles of investing in individual stocks. 

Growth investors prefer stocks with significant capital appreciation potential. Value investors prefer companies trading for low multiples of earnings and/or equity.

Dividend investors prefer stocks that pay dividends, as the name implies. There’s a specific subset of dividend stocks that stands out for its longevity: the Dividend Aristocrats. The Dividend Aristocrats comprise 65 high-quality securities in the S&P 500 that have 25 or more years of consecutive dividend increases. The S&P 500 Dividend Aristocrats Index tracks their collective performance.

An Overview of the Dividend Aristocrats

To qualify as a Dividend Aristocrat, a stock must satisfy a unique set of criteria. Notably, companies are required to have at least 25 consecutive years of dividend increases.

Secondary criteria include being listed in the S&P 500 Index, having a float-adjusted market cap greater than $3 billion, and trading with an average daily value of $5 million or more for the three months prior to the rebalancing date for the Dividend Aristocrats Index.

It is a rare feat for a business to increase its dividend for 25 consecutive years. To do so, a company must increase its dividend during recessions and shifts in the economic and political landscape.

The Dividend Aristocrats include well-known blue-chip securities like the following:

  • AT&T (T)
  • Walmart (WMT)
  • Johnson & Johnson (JNJ)

Interestingly, the Dividend Aristocrats have generated strong relative performance during down markets. From January 31, 1990, through December 31, 2018, the Dividend Aristocrats outperformed the S&P 500 Index 70.59% of the time in down months, and 44.10% of the time in up months (according to S&P Dow Jones indices).

It makes sense that Dividend Aristocrats would generate solid relative performance during difficult market periods. Dividend Aristocrats tend to have strong balance sheets and quality management teams.

While they are likely to appeal to conservative income-seeking investors looking for equity investments, the high-quality Dividend Aristocrats are not high-yielding securities as a group.  The index currently has a 2.2% dividend yield versus 1.5% for the S&P 500 Index.

Generating Income by Monetizing the Upside Potential of Dividend Aristocrats

Income investors in search of higher current yields might focus on enhancing the Dividend Aristocrats using covered calls for this reason.   In fact, by writing covered calls on the Dividend Aristocrats, the Cboe S&P 500 Dividend Aristocrats Target Income Index (Ticker: SPATI) strategy seeks to do just that, while targeting a yield 3% over the S&P 500 dividend yield. 

This can bring the total yield close to, and in some cases potentially greater than, that of high-dividend-paying stocks. This way, investors have the potential to achieve yield similar to high-dividend payers, along with the relative outperformance of the dividend growers. 

DISCLAIMER

The views, opinions and content presented are for informational purposes only. They are not intended to reflect a current or past recommendation; investment, legal, tax or accounting advice of any kind; or a solicitation of an offer to buy or sell any securities or investment services. Nothing presented should be considered to be an offer to provide any Cboe Vest product or service in any jurisdiction that would be unlawful under the securities laws of that jurisdiction. We have made every attempt to ensure the accuracy and reliability of the information provided, but it cannot be guaranteed. Past performance is no guarantee of future results.