The S&P 500 Dividend Aristocrats – Everything You Need to Know

Dividend Aristocrats are companies on the S&P 500 Index that have increased their annual dividend payouts for at least 25 consecutive years.

While the basic definition is indeed rather simple and straightforward, there are many additional aspects of Dividend Aristocrats that investors should understand. Understanding the nuances and characteristics of which companies meet all the requirements of the Dividend Aristocrats designation can assist investors in stock selection. Investors who are seeking equities with rising dividend income payouts can especially benefit from this information. Indeed, this information can aid them in the selection of the best stocks for their investment portfolio if it follows a long-term time horizon strategy.

The S&P 500 Index

As the name implies, the index comprises 505 stocks. Well, the index does contain the stocks of only 500 companies. However, five of the included companies have two separate classes of their shares included in the index — Alphabet Inc, (NASDAQ:GOOGL and NASDAQ:GOOG), Discovery, Inc. (NASDAQ:DISCA and NASDAQ:DISCK), Fox Corporation (NASDAQ:FOXA and NASDAQ:FOX), News Corporation (NASDAQ:NWSA and NASDAQ:NWS) and Under Armour, Inc. (NYSE:UA and NYSE:UAA). Alternatively, while Berkshire Hathaway, Inc. also has two classes of stock (NYSE:BRK.A and NYSE:BRK.B), only the Class B stock is included in the S&P 500 Index. Berkshire Hathaway’s Class A stock does not trade in any significant volume because of the stock’s high price — $339,787 per share at the end of trading on December 10, 2020. Therefore, the S&P 500 leaves this particular class of share out of the Index.

To meet the eligibility requirements for inclusion in the S&P 500 Index, all equities must belong to corporations domiciled in the United States that have common shares of stock available to the public. Additionally, the corporations must have a minimum market capitalization of $8.2 billion and minimum monthly trading volume of 250,000 shares for the six months preceding the index’s quarterly rebalancing date. The quarterly rebalancing occurs in March, June, September and December. Furthermore, each corporation’s average daily trading value must exceed the float-adjusted market capitalization.

While the S&P 500 Index offers a better representation of the overall market for general investors, the Dividend Aristocrats group offers an overview of stocks with long-term dividend distributions that are well-suited for income investors.

Dividend Aristocrats Origins

While the S&P 500 traces its roots to a 233-stock index compiled by the Standard Statistics Company in 1923, the index did not take its current shape and name until 1957. However, the first S&P 500 Dividend Aristocrats list was not published until 1989 and contained only 26 companies. Like the S&P 500, the Dividend Aristocrats list rebalances quarterly, but on a different schedule — January, April, July and October.

With the quarterly rebalancing, the number and makeup of the Dividend Aristocrat list components began expanding immediately after its introduction in 1989. By 2001, the list reached its highest level and included 66 companies. The list was pared down to 52 companies by 2008 and, in the aftermath of the financial crisis, dropped to just 43 companies in 2009. Since that drop, the list has expanded again and currently contains 65 companies.

Eligibility

Inclusion in the S&P 500 Index is one of the main eligibility requirements for achieving the Dividend Aristocrat designation. The initial market capitalization requirement was $3 billion. However, as all components of the S&P 500 must meet the $8.2 billion minimal capitalization requirement, the $3 billion minimum for the Dividend Aristocrats designation is outdated. The only other major condition that companies must meet for inclusion among the Dividend Aristocrats is the requirement to have 25 years or more of consecutive annual dividend hikes.

In addition to these two main eligibility requirements, companies must have a minimum $5 million average daily trading value during the three-month period before the rebalancing date. Moreover, the index also must have no fewer than 40 components and no sector of the economy can exceed 30%. This diversification requirement uses the Global Industry Classification Standard (GICS) to calculate the total market capitalization by sector.

While the 25-year requirement might seem arbitrary, this specific period offers a balance of stocks with long streaks of stable dividend growth and a list short enough for a detailed analysis. For instance, the Dividend Kings, a subset of the Aristocrats group, includes stocks with at least 50 years of consecutive annual dividend hikes. While these stocks certainly offer long-term income benefits, the list currently includes only 16 companies, which might not offer enough variety to meet the demands of all investment portfolio strategies.

Alternatively, investors and financial professionals have developed other lists of dividend-paying equities with various minimum requirements, such as five or 10 consecutive years of annual dividend hikes. In addition to a lower entry threshold, these other lists — Dividend Achievers, Dividend Challengers, Dividend Contenders, etc. — are not confined to inclusion in the S&P 500 Index. Using these criteria to identify equities with long-term rising dividends has expanded the list of eligible companies that have increased their annual dividend for at least the last five years to 65.

Even lowering the minimum eligibility requirement for the S&P 500 Aristocrats from 25 to 20 years would expand the list three-fold from the current 57 to more than 150 stocks. Therefore, the 25-year minimum cutoff seems to offer the right balance of long-term income distribution performance and variety to satisfy most portfolio strategies.

Value for Investors

Financial experts and investment professionals currently disagree whether dividend distributions are even helpful to the overall performance of an equity. While both sides of the argument make valid points, the back-tested data offers clear support for the argument which claims that dividends do offer advantages. The historical data analysis of long-term performance supports the notion that dividend-paying companies deliver higher total returns, as well as reduced volatility.

The graph below supports the argument as well. As the graph indicates, the Dividend Aristocrats outperformed the overall S&P 500 by a noticeable margin and delivered higher total returns. Just over the past decade, the cumulative advantage over the entire S&P 500 Index was more than 11%.

Chart Source: S&P Dow Jones Indices

Extended periods of steadily rising dividend payouts tell investors that a particular company is able to maintain efficient capital management and control. Furthermore, long-term rising dividends also signal that the company is able to generate levels of earnings and cash flow that are sufficiently high to cover rising dividend payouts without impacting its operational priorities and funding for expansion.

In addition to implying the presence of efficient financial management, steady dividend growth over the long term also suggests that a company has the ability to navigate changing market conditions by adjusting its expectations accordingly. A company that can adjust and effectively get through the boom-bust cycles that will occur during a 25-year span must be well-managed. Either that or it offers a product or service a cut above the rest, enabling it to deliver highly reliable returns.

Breakdown by Sector

The 65 companies currently in the Dividend Aristocrats group represent all 11 GICS sectors. However, the Materials, Consumer Staples and Industrials sectors have significantly more representation among the Aristocrats than in the overall S&P Index. This is because the S&P Index favors Information Technology, Energy and Real Estate. The graph below provides a complete market capitalization share by sector as of the most recent rebalancing.

Chart Source: S&P Dow Jones Indices

Referencing the Dividend Aristocrats list offers investors an easily accessible basis for a more detailed analysis that will enable them to identify the best potential investment opportunities for an investment portfolio that will deliver a reliable dividend income and steady asset appreciation. Any of the companies that able to boost their annual dividends for at least 25 years can appear to be easy choices for inclusion in any income portfolio. However, as with all investment decisions, investors should evaluate additional metrics and indicators in order to be able to pick the best stocks to maximize their total returns and wealth creation in the long run.

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