Dividends for a Down Market

"Lean Times For Income Seekers" reads a recent Seattle Times headline. The article reveals that 100 companies cut their dividends in the second quarter, bringing the ratio of increases to decreases to its lowest level since 1991.

Pretty scary times, huh? Especially when financials, the biggest dividend-paying sector and the backbone of our economy, are behind most of the reductions. Even the behemoth that is Citigroup (NYSE: C  ) was forced to cut its dividend by 41%. Another juggernaut, Wachovia (NYSE: WB  ) , trimmed its own by 92%.

But it isn't doom and gloom for a select few ...
Enter the Aristocrats.

The S&P 500 Dividend Aristocrats Index, that is. The folks at Standard and Poor's have put together an index of S&P 500 members that have raised their dividends in each of the past 25 years. The list currently comprises 60 companies.

The criteria for being added to this rarified group are simple: a company must be a member of the S&P 500 index and must have raised its dividends in each of the past 25 years.

Miss a year and you're out. Come back when you have another 25-year track record.

It's brutal -- but that means it's a pretty exclusive group. Big boys like Bank of America (NYSE: BAC  ) rub shoulders with dividend all-stars Eli Lilly (NYSE: LLY  ) , Lowe's (NYSE: LOW  ) , and the like.

And they're set apart in another way, too.

Outperformance
The Dividend Aristocrats have outperformed their parent index substantially. They've fallen only 5% year to date, versus the 13% drop in the broader S&P 500 -- despite being overweight in financials and underweight in energy vs. the larger index. And since 2000, the Aristocrats have returned 7.5% vs. 2.8% for the S&P 500.

Studies have shown that dividend payers collectively outperform the market -- especially during a bear market -- and the Aristocrats' long history of growing dividends only improves on that.

These companies are built to last
What can we learn from these overachievers as we look for other strong dividend payers?

They have a few common characteristics:

  • There's a heavy weighting toward basic consumer businesses as opposed to "hot" sectors: 22 consumer products companies versus only two technology companies (Automatic Data Processing (NYSE: ADP  ) and CenturyTel) and one energy issue (ExxonMobil (NYSE: XOM  ) ).
  • They have durable competitive advantages.
  • They have unassailable brands.
  • Warren Buffett owns fully 10% of the companies on the list.

Even more dividend powerhouses
The S&P 500 Dividend Aristocrats Index is a good source for finding strong companies with proven track records of success in good times and bad. Most of these firms are in stable, slower-growing industries like paint, soft drinks, and tissues. Since these products don't undergo much rapid change, the dominant companies continue to generate cash flow and strengthen their businesses over time. Buying shares of such companies on the cheap is a proven way to crush the market over time.

If you'd like even more names to consider, take a look at Motley Fool Income Investor. We deliver two dividend-paying recommendations to your inbox every month alongside our best recommendations for new money now. Our picks are outpacing equal amounts invested in the S&P 500 by 8 percentage points, and our average yield is 5%. You can have a free, 30-day trial -- with no obligation to subscribe -- by clicking here.

Motley Fool analyst Andrew Sullivan loves dividends, but does not have a financial position in any of the stocks mentioned in this article. Bank of America and Eli Lilly are Income Investor recommendations. The Motley Fool has a disclosure policy


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  • Report this Comment On September 06, 2008, at 11:26 PM, TimHou wrote:

    Well stated. One great big caveat. Small time investors appreciate the Dividend Reinvestment Programs (DRIP) as tortoise method of establishing a position. Many companies offer Buy Direct plans as if these are for the stock buyer's benefit.

    Buyer BEWARE. Some companies cover investment costs of DRIP plans, some contract with Agents that charge little for the shares purchased. Other corporations allow agents, like the pitiful ComputerShare charge a 5-6% hit on each and every purchase made including dividends. That makes fair dividend yields of 2.6% mut.

    Don't get snookered into DRIP program "loads" or fees you would never think of paying when buying a mutual fund.

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