Based on the name, most people would expect a Dividend Aristocrat to be an excellent dividend-paying stock. This is true, but there is much more than that. In short, a Dividend Aristocrat needs to meet a couple of conditions for it to be considered so. First, it needs to be a member of the S&P 500 Index. Second, it needs to have had at least one dividend increase on an annual basis for at least the last 25 consecutive years. Suffice to say that the second condition is much more challenging than the first, which is why the number of Dividend Aristocrats can be counted in the double-digits.
Why Is Becoming a Dividend Aristocrat So Difficult?
Becoming a Dividend Aristocrat is a huge challenge because corporations can’t keep on raising their dividends unless they are experiencing consistent success in year after year. This means that a Dividend Aristocrat must have very strong fundamentals. Moreover, this means that a Dividend Aristocrats’ very strong fundamentals must be very resilient as well, so much so that they can remain so for multiple decades at a time.
As a result, it should come as no surprise to learn that the number of Dividend Aristocrats see significant changes whenever a serious economic recession happens. After all, a corporation can’t be counted among their numbers unless they can continue increasing their dividends in consecutive years. Something that can be challenging for a lot of corporations even in good economic times but becomes much more so in bad economic times. Due to this, it isn’t a coincidence that some of the longest-running Dividend Aristocrats are corporations such as American State Water, which has 50-year contracts with the federal government. Something that provides it with a measure of stability that most corporations can’t even hope for in their dreams.
Why Should You Consider Adding Some Dividend Aristocrats to Your Investment Portfolio?
Regardless, there are numerous reasons why investors might want to add some dividend aristocrats to their investment portfolios. However, the exact reason can see significant differences from person to person because not everyone invest for the same reasons.
For example, one person might want to buy some Dividend Aristocrats because they want a reliable source of cash coming in from their investment portfolios. In short, just because a stock provides the investors with a return on their investment, it doesn’t mean that return will come in the form of a stream of cash. Instead, if the return comes in the form of appreciation, investors won’t actually be able to turn that into cash unless they take the step of selling those stocks, thus preventing themselves from being able to reap further benefits from them. As a result, people who want cash coming in from their stocks without having to sell their stocks should seek out dividend stocks. Out of those, Dividend Aristocrats are by far the most reliable choices based on their past performances, thus explaining their name.
However, getting a reliable stream of cash isn’t the sole reason that an investor might be interested in Dividend Aristocrats. For example, some people might seek them out because they are concerned about the potential impact of bad economic times on their investment portfolios, meaning that they want some of their money to be sunk into something that can continue performing well even under those circumstances. Likewise, Dividend Aristocrats can exist in various industries, meaning that there are those who might seek them out for diversification based on spreading out into multiple industries as well. Ultimately, investors don’t need to make investment choices based on single factors but can instead target a number of them with the same investments.
With that said, interested individuals should keep one very important thing in mind when looking over Dividend Aristocrats. In short, a stock has to meet just two conditions for it to receive said status. As a result, it is perfectly possible for a Dividend Aristocrat to have lower than average dividends even if its dividends are continuing to increase over time. Due to this, interested individuals need to remember that Dividend Aristocrats are called thus because of their exceptional reliability in a single respect, meaning that they need to look at other factors of their performance as well if they want to be absolutely sure that said stocks are right for them.