What are Dividend Aristocrats?

What you’ll learn:

• What are Dividend Aristocrats.
• Why a focus on sustainable dividends is important.
• How to get access to these companies.

Investors seeking an income are always on the lookout for companies that pay reliable and sustainable dividends. But it can be difficult to decide which companies are worth looking at.

Here, we look at an investment strategy that focusses on companies who have managed to increase their dividends for a sustained number of years.

Remember though that there are no guarantees that dividend growth will continue.

Like the value of the underlying investments that produce them, dividends can fall as well as rise. You could lose money, and past performance is not a reliable guide to what might happen in the future.

What are dividends?

Dividends are payments made by a company to its shareholders out of its post-tax profits. These payments are not fixed and therefore they move up and down like a company's share price. They can be paid once, twice, even four times a year – or a company can choose not to pay a dividend at all.

Dividend Aristocrats

Back in the 1980s, the term ‘Dividend Aristocrats’ was given to a select number of companies in the US who had consistently increased their dividend over many years.

The technology company IBM is one such company that has paid its shareholders a dividend every three months since 1916; a time when the company’s most advanced product was a machine to clock workers in and out of factories.

Since then, the name IBM has become synonymous with home and office computing, and the company has continued to pay a dividend every single year; through the Great Depression and subsequent recessions. In fact, 2019 is the 24th year in a row IBM has increased its quarterly cash dividend. IBM is certainly a Dividend Aristocrat.

McDonald’s is another example of a Dividend Aristocrat. Since paying their first ever dividend in 1976, the company has increased it every single year since – 43 years of increases.

Dividend Aristocrats also exist in the UK. The drinks giant Diageo, producers of Guinness, Pimms and Smirnoff Vodka has increased its dividend for the last 21 consecutive years.

Sustainability

Why is this focus on increasing dividends so important? At the top of the wish list of investors looking for income is stable returns. And as bond yields have fallen in recent years – the last time they were this low was just after the UK voted to leave the EU in 2016¹ – dividends represent an increasingly important source of income. This income represents a key part of the total returns investors get from owning shares.

If reinvested rather than taken as income, dividends can be used to buy more shares, which hopefully will grow in value, boosting overall returns. This is known as compounding, whereby your returns also earn returns.

An attractive feature about dividends is they represent the only return from a share, which, once paid, cannot be taken back. The same cannot be said for share prices, whose volatile nature means the profit you may have made one day can be given back if the share price falls the next day.

However, the biggest hurdle comes when trying to find companies that can consistently pay dividends. Only the fittest and strongest of companies can typically do so. Therefore, a company that has been able to pay and increase its dividend in both the good times and bad would deserve a closer study. Always bear in mind though that, no matter how good the dividend-paying record of the company in question, this past performance is not necessarily a reliable indicator of its future performance. Profitability, on which it depends, can change as can the discretionary policies of the boards of directors.

A structured approach via ETFs

A quick and cost-effective way to gain exposure to a basket of companies that have historically been growing their dividends is via an Exchange Traded Fund (ETF). State Street Global Advisors has a suite of Dividend Aristocrats ETFs, under the name SPDR, covering five regions – US, UK, Europe, Asia and Global. Each of these ETFs has their own methodology for selecting companies.

• SPDR US Dividend aristocrats ETF
• SPDR UK Dividend aristocrats ETF
• SPDR Euro Dividend aristocrats ETF
• SPDR Pan Asia Dividend aristocrats ETF
• SPDR Global Dividend aristocrats ETF

The SPDR US Dividend aristocrats ETF, for example, looks for companies that have increased their regular dividends for at least the last 20 years. As at the end of September, the ETF was invested in 115 companies including Coca-Cola, Johnson & Johnson and McDonalds.