With income drying up everywhere else, investors can't get enough dividends. While some people prefer the big payouts that the highest-yielding stocks generate, others prefer slow but steady growth in dividends over time.
If you're in the latter camp, then you need to know about the Dividend Aristocrats. Created by Standard & Poor's, this elite group includes some of the best dividend stocks you can own in your portfolio. But recently, S&P made a change to its methodology that opened up the door to some new stocks.
I'll tell you about the newest additions later in the article. But first, let's find out what makes a Dividend Aristocrat and why getting onto this exclusive list is so hard to do.
Joining the aristocracy
When you're looking at dividend stocks, one of the first criteria you want to look at is a stock's dividend history. One of the hardest things for a company to do is to maintain stable dividends. Think about it: With most industries going through cyclical ups and downs that have a direct impact on their income and available cash flow, it can be challenging for a company to make sure it always has the cash on hand to pay its shareholders. From the market meltdown back in 2008 and early 2009, we know all too well how easy it is for seemingly solid dividend payers to have to reverse course and reduce or eliminate their payouts due to financial difficulties.
So if merely sustaining a dividend payout over the decades is hard, think how much harder it is to consistently increase those dividends year in and year out. Through good times and bad, finding more money every year to pay investors is something that few companies have managed to achieve, even among the largest, most successful stocks in the entire market.
But a handful of companies have managed to put together impressive track records. Those that are in the S&P 500 index and have increased their dividends every year for at least 25 years qualify as Dividend Aristocrats under S&P's definition.
Keeping it special
So if it's so hard to become a Dividend Aristocrat, why did S&P take steps to make it easier? The reason has to do with an oddity in classifying dividend payments.
Under the old methodology, S&P included special dividend payments in their calculations of whether a company increased or decreased their dividends. That created a problem, because if a company chose not to pay another special dividend in subsequent years, it would end up breaking its streak -- even if its regular dividends continued to rise. In other words, S&P didn't truly respect the "special" nature of the dividend, instead treating it as a regular part of the total.
The new methodology takes out those special dividends. Instead, what counts is a company's regular dividend payout. That allowed some stocks to qualify that didn't under previous rules.
If you graph out dividend payments over time for the stocks that were recently added to the list because of the new methodology, you find two different patterns. With some stocks, including Nucor (NYSE: NUE ) , Franklin Resources, AT&T (NYSE: T ) , and Illinois Tool Works (NYSE: ITW ) , one or more quarterly dividends included a special payout, so you'll find temporary spikes in the total payout. On the other hand, some other stocks, such as HCP, Medtronic (NYSE: MDT ) , and T. Rowe Price, made special payments at times other than their regular dividend date, creating what appears on a graph to be a one-time dividend cut.
The other additions to the index were Sysco (NYSE: SYY ) , Colgate-Palmolive, and Genuine Parts (NYSE: GPC ) . CenturyLink (NYSE: CTL ) was the lone removal listed under the new methodology, although it wouldn't have qualified in any event because it failed to raise its dividend this year.
Don't settle for less than the best
If you want great dividend stocks, you can't afford to choose second-rate stocks. Even though the new methodology let some extra stocks onto the Dividend Aristocrats list, they all still share the long track record of dividend increases that can mean huge long-term returns for your portfolio.
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