Don't Mess With the Aristocrats

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If you're a follower of dividends, you've probably heard of the Dividend Achievers, an index of companies that have increased their dividends regularly for 10 or more years. Better still, there are the Dividend Aristocrats, S&P 500 companies that have upped their payouts to shareholders for a truly impressive 25 years in a row.

Here are some of the 52 dividend aristocrats that S&P included as of the end of 2008. As you can see, many of these stocks have gained favor with our Motley Fool CAPS community and have good overall returns as well as healthy dividends:


CAPS Rating

Dividend Yield

10-Year Avg. Return

McDonald's (NYSE: MCD  )




Walgreen (NYSE: WAG  )




Target (NYSE: TGT  )




Archer Daniels Midland (NYSE: ADM  )




Sherwin-Williams (NYSE: SHW  )




Abbott Laboratories (NYSE: ABT  )




Johnson Controls (NYSE: JCI  )




S&P 500




Data: Motley Fool CAPS, Morningstar, Yahoo! Finance.

What's the big deal?
Why all this attention to dividend-paying stocks? Well, consider this data from the folks at Standard & Poor's: Since 1926, the total return from stocks has come about one-third from dividends and the rest from capital appreciation. That means that stocks that both pay reasonable dividends and have good growth prospects bring investors the best of both worlds.

Even more powerful is the practice of reinvesting dividends into additional shares of stock. According to Standard & Poor's, if you invested a single dollar into the S&P 500 at the beginning of 1930, it would have grown to $42 by the end of 2007. But if you'd reinvested the dividends you received along the way instead of taking them in cash, you'd have, amazingly, $1,052 instead of $42!

The Dividend Aristocrats Index tries to capitalize on those favorable trends. And over the years, it's done a good job: The index has returned an annualized 9.1% a year since 1989, beating the S&P by 2.5 percentage points annually.

There -- let all that information sink into your head and you'll be in on a huge secret that many investors don't know about. Few investors really appreciate how well dividends can serve us, even giving us regular raises.

Don't shake it up!
Here's an interesting development, though: It seems that many hands have been wrung lately over the Aristocrats. It seems that their number is dwindling. Well, that makes sense. Given all the upheaval our economy has undergone lately, it's no secret that many well-known and well-respected companies have failed to hike their dividend this year, or have even reduced or eliminated it. General Electric cut its dividend, for example, as did Citigroup

Consider this: In 2008, a record was set when dividend reductions totaled $40.6 billion. So far in 2009, though, $42 billion in dividends has evaporated. We're on quite a roll this year. One effect of this is that the ranks of the Dividend Aristocrats could shrink considerably, perhaps to fewer than 40 companies.

This has led Standard & Poor's to suggest that it might have to tweak its inclusion criteria for the index. To this I say: Whaaaat?!

Here's the problem
That's a bad idea in many ways. For one thing, the index will lose some of its meaning and power. Right now, its components are companies that we know have cleared a very high hurdle. They've racked up quite a record, over 25 (and often many more) years. If it were suddenly easier to make the list, say by posting dividend hikes for only 20 or more years in a row, we'd have to have a little less respect for its components.

Also, changing the criteria will make it hard to crunch numbers with the index's data. It will become a matter of apples and oranges if you're trying to calculate how well the Aristocrats have done over time when they haven't been selected in the same way over time.

I think the index-keepers should stick to their guns. If the list of companies falls to even a mere dozen, that will be a truly impressive dozen. And what's wrong with a dozen, anyway? Why do we need the list to be larger? Besides, over time, more companies will join the list, as those with 21, 22, 23, and 24 years of increases cross over the 25-year threshold.

It doesn't seem right to change the rules of the game just because the outcome isn't what you'd like to see. It reminds me of how some executives have had their options repriced when their companies' share prices fell.

What to do
So, keep an eye on Standard & Poor's to see what it does. And in the meantime, remember that this is a great time to load up on dividend-payers for your portfolio.

If you'd like to find more strong dividend-paying stocks, take a look at our Motley Fool Income Investor service, which you can try for free. On average, its picks are beating the market handily, with many recommendations sporting yields of 8% or more.

Longtime Fool contributor Selena Maranjian owns shares of McDonald's. Sherwin-Williams is a Motley Fool Stock Advisor pick. Try our investing newsletters free for 30 days. The Motley Fool is Fools writing for Fools.

Read/Post Comments (2) | Recommend This Article (7)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 06, 2009, at 2:19 PM, esxokm wrote:

    Great article! I'm surprised KO did not make the list. It's my favorite dividend stock. I own KO and GE, am truly amazed that the latter reduced its payout. Goes to show that anything can happen. But if KO was able to up its payout this year, I think that means that the stock should be safe for quite a long time.

  • Report this Comment On April 07, 2009, at 8:31 AM, rd80 wrote:

    I agree the rules for the Dividend Aristocrats should not be changed. The appeal of these stocks is they've demonstrated they can increase dividends in good times and bad. What good is it to an investor to know a company can do well provided they get a few mulligans?

    ETFs could be the reason the index keepers want a large number of names in the index. As the list of names gets smaller, it becomes more practical for investors to sift through the list for picks or even build their own fund rather than buying the ETF.

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