In today's low-rate environment, dividend stocks are more popular than ever as one of the only sources of substantial, dependable income. As income-producing alternatives have become increasingly ineffective in delivering the cold, hard cash that investors need, being able to separate high-quality dividend stocks from the rest of the dividend-paying crowd is a crucial skill.
One tool that dividend investors use to find the cream of the dividend-stock crop is the Dividend Aristocrats list. This elite group has proven itself by not only paying dividends but also raising them regularly over long periods of time. Yet just this week, the folks responsible for running the Dividend Aristocrats have lowered their standards for eligibility.
Later in the article, I'll reveal the new Aristocrats and talk about whether they really deserve to be part of this elite group. But first, let's look at why investors follow the Dividend Aristocrats in the first place.
The royalty of the income world
Most dividend investors judge stocks based on their dividend yields. The idea behind focusing on yield is simple: For many investors, when it comes to payouts, more is better.
But high-yielding stocks don't have a great track record of remaining high-yielding stocks. All too often, what drives a dividend yield up isn't strength in the payout but rather weakness in the share price, which often precedes dividend cuts that sabotage the expectations of shareholders.
By contrast, Dividend Aristocrats don't focus on yield at all. Rather, all the companies on the old list became eligible to be a Dividend Aristocrat when they had increased their annual dividend payout for 25 consecutive years.
The value of measuring streaks of dividend increases is in showing a company's ability to get through good times and bad while still treating their shareholders right. It's easy to raise dividends during good times, but being able to sustain and grow dividend payouts even during recessions and other turbulent market environments demonstrates how strong a dividend stock is.
Wow, you look five years younger!
Now, though, some of the luster of being a Dividend Aristocrat is disappearing. As Barron's reported yesterday, S&P Dow Jones Indices, which manages the list, decided to require only 20 consecutive years of dividend increases rather than 25. As a result, the broad list of Aristocrats drawn from the S&P 1500 Composite index of large, mid, and small caps will now include 14 new stocks, including four that are members of the S&P 500
Among the new Aristocrats, one definitely has the seal of old-Aristocrat approval. Chevron
With 21 years of dividend increases, General Dynamics
Perhaps the most controversial addition is Avon Products
Still worth following
Making it easier to qualify as a Dividend Aristocrat definitely takes a little of the shine away from being part of the prestigious list. But all in all, stocks that qualify have still demonstrated their commitment to dividend growth, and for many investors, that's the real key.
To get more ideas of stocks that pay strong dividends, let me suggest that you read our special report, "Secure Your Future With 9 Rock-Solid Dividend Stocks." As the name implies, we're going to give you access to some of the best dividend companies in the world, and best of all, this report is completely free, so don't miss out!
Tune in every Monday and Wednesday for Dan's columns on retirement, investing, and personal finance. You can follow him on Twitter @DanCaplinger.