There are roughly 6,000 stocks listed on the NYSE and the Nasdaq. In 2024, just 67 of those are included in the elite S&P 500 Dividend Aristocrats index.
Those 67 Aristocrats are recognized across the investment community as quality stocks that pay rising dividends. But do they fit your investment approach? Read on to find out. You'll also meet the 10 highest-yielding Aristocrats as of the first quarter of 2024.
Understanding Dividend Aristocrats
Let's start by reviewing how dividend stocks earn the coveted Aristocrat label and how those qualifications benefit you as an investor.
What Are Dividend Aristocrats?
Dividend Aristocrats are S&P 500 companies that have increased their dividends annually for the most recent 25 years. There are two primary requirements embedded in that description, and each is significant:
- represent the largest public companies listed on the U.S. stock exchanges. While there are only 500 stocks in the index, they collectively account for roughly 80% of the stock market's overall value. Members of the index must meet and retain minimum capitalization, liquidity and profitability requirements.
- A 25-year track record of annual dividend increases in 2024 means the company raised shareholder payouts in the aftermath of the dotcom bubble, the financial crisis of 2007 and the pandemic. That implies a stable business model, high visibility into cash flow production and disciplined capital allocation.
Note that dividend increases in this context are adjusted for stock splits. So, a stock that splits 2-for-1 could theoretically lower its dividend by 49% in the same year and retain its growth track record.
Sector Breakdown
Most of the Dividend Aristocrats are in the defensive consumer staples sector. Industrials, materials and financials are also heavily represented.
The specific sector breakdown, rounded to one-tenth of a percent, is below. The data comes from the ProShares S&P 500 Dividend Aristocrats ETF
- Consumer staples: 24.7%
- Industrials: 23.3%
- Materials: 12.4%
- Financials: 10.6%
- Health care: 9.9%
- Real estate: 4.7%
- Consumer discretionary: 4.6%
- Utilities: 4.3%
- Information technology: 3.1%
- Energy: 2.5%
The brain trust at Forbes has run the numbers, conducted the research, and done the analysis to come up with some of the best places for you to make money in 2024. Download one of Forbes' most popular and widely anticipated reports, 12 Best Stocks To Buy for 2024.
Benefits For Long-Term Investors
Established, long-time dividend-paying stocks like the Aristocrats offer investors low volatility, a dual return profile and reliable, inflation-friendly income.
Low Volatility
Decades of dividend growth create a massive cash flow burden. As an example, International Business Machines (IBM) paid shareholders $6 billion cumulatively in dividend payments in 2023. The year before, the total dividend payout was $5.8 billion.
Covering that rising burden year in and year out requires a business model that consistently produces profit and cash flow growth—even when the economy falters. That type of performance attracts more investors in market downturns, which supports lower downside volatility.
Regular, reliable dividend payments also constrain stock-price volatility. When the market is dropping, dividend payers are often a portfolio's best performers. They are producing cash returns at a time when other stocks are losing value. That dynamic encourages investors to hold their dividend payers in the worst of times.
Dual Return Profile
Dividend-paying stocks provide two avenues to earn: share price appreciation and dividends. This provides a nice balance between tax-friendly, unrealized gains and cash in hand.
Reliable Income
A company can cancel or lower its common stock dividend at any time, which means no dividend is completely reliable. But Dividend Aristocrats are an elite bunch. Their leadership teams have spent decades managing capital carefully to achieve and retain a superior dividend growth track record. They're not likely to change their dividend strategy unexpectedly.
If a dividend cut is necessary, investors should see signs of trouble brewing. That's what happened with former Aristocrats AT&T (T) and Walgreens Boots Alliance
AT&T signaled months ahead of time that it would spin off WarnerMedia and cut its dividend accordingly. The telecom was dropped from the Aristocrats in 2022. WBA has been struggling to manage lackluster spending on personal care products and Covid-19 tests and vaccines. The retailer announced a big cost reduction effort last year; trimming the dividend in early-2024 followed as a next step to conserve cash.
Inflation-Friendly Income
Dividend Aristocrats can function as an inflation hedge because the cash payments should rise over time. This is one reason why retirement savers appreciate these premier dividend-payers. The increasing income does a better job covering living expenses over time vs. income sources that are constant.
Summarizing those advantages, Dividend Aristocrats are attractive to long-term investors with a moderate risk appetite and corresponding growth expectations. They're a nice middle ground between low-risk bonds and high-growth stocks. They should perform better than bonds in the long run, but they won't outgrow the fastest-pace tech stocks or companies that plow all excess cash into expansion.
Aristocrats are less suitable for shorter-term traders who are seeking market-beating returns. These dividend-payers generally don't have the volatility or growth potential to support that strategy.
Researching Dividend Aristocrats
When researching Dividend Aristocrats, let your investment priorities be your guide. If you're seeking reliable and increasing passive dividend income, focus on evaluating the dividend's sustainability. You can do that by diving into the business model, the current yield and payout ratio, plus the company's cash flow history and leverage.
Business Model
Research how the business makes money and the key factors to its success. Understanding a company's products, customers and competitive advantages equips you to evaluate the potential impacts of new or changing circ*mstances.
You can also draw conclusions about the company's growth plans and its ability to execute them. Successful growth efforts are necessary for companies that regularly increase dividends.
Yield
Dividend yield is a measure of the investment's income efficiency. It's calculated as the annual dividend payment divided by the stock price.
Yields for Dividend Aristocrats range from less than 1% to more than 6%. If you prefer the high side of that range, make sure you understand why the yield is above average. The reason could be negative, such as a falling stock price. Or, it could be because the company is a REIT that must pay out most of its profits to shareholders.
Payout ratio
Payout ratio is the percentage of earnings the company pays out in dividends. A low payout ratio below 40% indicates the company's profits easily cover the dividend. A very high payout ratio, above 80%, could signal that the dividend is not sustainable.
Note that payout ratios calculated on GAAP earnings can spike or dip in a reporting period due to one-time expenses or windfalls. Be sure to dive into the specifics and review more than one reporting period to get a sense of the company's normalized payout performance.
Cash flow history
An annually increasing dividend payout requires an ever-growing source of cash. Review the company's free cash flow performance for the last 10 years. You want to see steady increases that aren't dependent on economic growth.
Debt levels
A heavy debt burden limits financial flexibility and puts dividends at risk if business conditions deteriorate. To assess debt levels, review the stock's leverage ratios relative to the company's own history and its competitors.
The net debt to Ebitda ratio is a good place to start. Net debt to Ebitda is a measure of how long it could take the company to pay off its debt.
The brain trust at Forbes has run the numbers, conducted the research, and done the analysis to come up with some of the best places for you to make money in 2024. Download one of Forbes' most popular and widely anticipated reports, 12 Best Stocks To Buy for 2024.
10 Highest-Yielding Dividend Aristocrats In 2024
The table below highlights 10 high-yielding Dividend Aristocrats.
Note: Kenvue became a Dividend Aristocrat in 2023 after being spun off as a public company by Johnson & Johnson
An S&P news release announcing Kenvue's place in the Aristocrats cited the split-off exchange that gave Kenvue shareholders the right to exchange their shares for JNJ shares. As a result, the index essentially gave Kenvue credit for JNJ's prior dividends. Johnson & Johnson remains in the index as well.
Dividend And Tax Considerations
Investing in Dividend Aristocrats creates tax liabilities in any taxable account. The type of taxes you'll pay on dividend income depends on whether those dividends are qualified or nonqualified. Qualified dividends are taxed at the lower long-term capital gains rates, while ordinary income rates apply to nonqualified dividends.
There are two primary components that distinguish qualified from nonqualified dividends:
- Qualified dividends are paid by tax-paying U.S. corporations or qualifying foreign entities. Note that REITs have special tax status, and their dividends are typically nonqualified.
- Qualified status requires a minimum holding period of more than 60 days in the 121-day period that begins 60 days before the ex-dividend date.
Fulfill those requirements and you'll pay a long-term capital gains rate of 0%, 15% or 20% on your qualified dividend income in 2024. The 0% rate is reserved for single tax filers whose taxable income is less than $47,025 and married, joint filers who earn $94,050 or less.
The 20% tax rate applies to single filers making more than $518,900 and married, joint filers who earn more than $583,750.
Ordinary income tax rates range from 10% to 37%. For single and married filers, respectively, income less than $11,600 and $23,200 gets the 10% rate. Income for single and married filers above $609,350 and $731,200, respectively, is taxed at 37%. Note that ordinary income is taxed in brackets at different rates, so the effective rate at those income levels will be lower.
To defer all taxes on dividend income, hold these investments in a tax-advantaged account such as an IRA.
Bottom Line
Dividend Aristocrats are an elite group of dividend-paying stocks that offer low volatility, a dual return profile and reliable, inflation-friendly income.
Still, despite their lengthy track records of dividend growth, Aristocrats do occasionally walk back their dividend strategy. So, do your research before investing. Learn the business model, investigate the drivers of the dividend yield and look at trends related to payout ratio, cash flow and leverage.
When you do trade into Dividend Aristocrats, you want to be certain you're investing in a good company with staying power. Then you can reinvest your dividends confidently and watch your wealth grow.
Frequently Asked Questions (FAQs)
Which Dividend Aristocrat Pays The Highest Dividend?
3M (MMM) pays a dividend yield of 6.2%. That comes from a stock price of $96.13 and an annual dividend of $6. Conglomerate 3M makes adhesives, cleaning supplies, coatings, compounds, electronics, components, office supplies and more for sale into a variety of industries.
Which Dividend Aristocrat Has The Longest Dividend Growth?
Dover (DOV) stock has the longest track record of dividend growth. According to the company website, DOV has raised its dividend for 67 consecutive years. The company makes and sells equipment, components, software and supplies for use in the automotive aftermarket, aerospace, industrial automation and defense industries.
How Are Dividend Aristocrats and Dividend Kings Different?
As noted, Dividend Aristocrats are S&P 500 members that have increased their dividends for the most recent 25 consecutive years. Dividend Kings are public companies that have increased their dividends for the most recent 50 years. Kings do not need to be S&P 500 constituents.
Are Dividend Aristocrats Safe Investments?
Safe is a relative term in investing, but Dividend Aristocrats are at the safer end of the spectrum for equities. They are well established businesses that have historically produced steadily increasing cash flow and, for shareholders, rising cash returns.
You can add another layer of protection by diversifying with a dividend ETF like NOBL that invests in Aristocrats.
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The brain trust at Forbes has run the numbers, conducted the research, and done the analysis to come up with some of the best places for you to make money in 2024. Download one of Forbes' most popular and widely anticipated reports, 12 Best Stocks To Buy for 2024.
