Why Invest in Dividend Aristocrats for the Long Term?

By Josh Arnold for Sure Dividend

Why invest in Dividend Aristocrats for the long term? It is based on the belief that buying stocks that have raised their payouts for at least 25 consecutive years has proven their mettle.

For investors looking to compound their wealth, picking high-quality dividend growth stocks to buy and hold has been shown to be a successful way to build wealth. There are many ways to pick dividend growth stocks, but one great place to start is by tapping into a list of Dividend Aristocrats that have at least 25 consecutive years of increasing their payouts.

In this article, we’ll explain why we like the Dividend Aristocrats, as well as provide three examples that we think are great long-term buys.

Why Invest in Dividend Aristocrats? Rising Payouts Are Compelling

The Dividend Aristocrats are a group of stocks that belong to the S&P 500 and have at least 25 consecutive years of dividend increases. Stocks that meet these requirements have stood the test of time in terms of competitive advantages, reliable, growing profits and recession resistance. Without all those factors, the longevity required to be a Dividend Aristocrat would be nearly impossible.

What is left when we apply these criteria is a group of just 66 stocks that have proven to be among the best-of-the-best in terms of dividend growth and longevity, and we see the Dividend Aristocrats as a great place to start the search for a dividend stock purchase.

Now, we’ll provide three examples of Dividend Aristocrats we think are well positioned for the years to come.

Why Invest in Dividend Aristocrats? Johnson & Johnson (NYSE: JNJ)

Our first stock is Johnson & Johnson, a highly diversified consumer products and healthcare company based in the United States that operates globally. The company has three distinct businesses: Consumer Health, Pharmaceutical, and Medical Devices. Through these segments, Johnson & Johnson manufactures and distributes a wide variety of consumer brands such as Aveeno, Listerine, Neutrogena and much more. In addition, it offers various pharmaceutical products for immunology, infectious diseases, oncology, and more. Finally, the company offers medical devices for a wide variety of ailments such as orthopedics, cardiovascular disease and metabolic disease, among others.

Johnson & Johnson traces its beginning to 1886, generates about $100 billion in annual revenue and has a current market cap of $455 billion.

We like Johnson & Johnson for a few reasons. First, it is inherently recession-resistant because of its immense, defensive product portfolio. The company sells consumer staples that tend to see steady demand irrespective of economic conditions, in addition to pharmaceutical and medical device products that tend to have very little correlation to economic activity. In other words, Johnson & Johnson has positioned its portfolio to be quite predictable and that means investors can be confident of earnings estimates. That kind of security helps investors through the emotional challenges of tough periods in the market.

That security also allows Johnson & Johnson to raise its dividend, and it has done so for a staggering 60 consecutive years, making it one of the best stocks in the world on that measure.

Why Invest in Dividend Aristocrats? McDonald’s (NYSE: MCD)

Our next stock is McDonald’s, the ubiquitous purveyor of fast food that operates about 40,000 stores worldwide, most of which are franchised. McDonald’s offers its familiar blend of breakfast, lunch and dinner items, covering all dayparts, and constantly innovates its menu to help keep it relevant.

The company was founded in 1940, and in the decades since, has grown to $24 billion in revenue – most of which comes from franchise and licensing fees – and a market cap of $193 billion.

We like McDonald’s because even though it operates in the restaurant category, which is typically highly cyclical, McDonald’s has managed to operate almost as a consumer staple instead. It’s low-cost, quick meals have proven popular even during recessions. In this way, the company has turned itself into a defensive, dividend growth stock.

McDonald’s also has a very impressive dividend growth streak, which currently stands at 47 years. The stock’s yield is 2.1%, which is almost a full percentage point better than that of the S&P 500. In addition, the payout ratio is only 56% of this year’s earnings, which makes it very safe considering the predictable nature of the company’s revenue streams, and robust profit margins.

Why Invest in Dividend Aristocrats? Coca-Cola (NYSE: KO)

Our final stock is Coca-Cola, the largest beverage company in the world. Coca-Cola manufacturers, markets and distributes hundreds of nonalcoholic beverage brands worldwide, in various categories such as sports drinks, water, sparkling water, tea and coffee, plant-based beverages, energy drinks and, of course, its soda brands such as its namesake.

Coca-Cola was founded in 1886, generates $42 billion in annual revenue and trades today with a market cap of $273 billion.

Like the others on this list, Coca-Cola operates like a consumer staple company in that its wide diversity of product, as well as the fact that its products are seen as an affordable luxury, means demand isn’t necessarily subject to economic conditions. We expect Coca-Cola to see steadily rising revenue and earnings in the years to come, irrespective of prevailing economic conditions globally.

Coca-Cola’s dividend history is virtually unparalleled, as the company has paid rising dividends for an outstanding 60 consecutive years following its February 2022 increase. That puts Coca-Cola in truly rare company on that measure, but the attractive nature of its dividend doesn’t end there.

The stock yields 2.8% today, which is about double that of the S&P 500, and the payout ratio is just 70% of earnings. While that’s somewhat higher than the others on this list, given the company’s reliable revenue and earnings, we see that as a perfectly acceptable level.

Why Invest in Dividend Aristocrats? Final Thoughts