Dividend Aristocrats are companies in the S&P 500 index that have increased the amount of cash dividends they pay to shareholders for at least 25 years straight. According to research from S&P Dow Jones Indices, these stocks outperformed the broader index roughly 69.3% of the time in down months for the overall market across a more than three-decade study period ending in 2021.
With that impressive performance and recent market turbulence in mind, a panel of Motley Fool contributors has broken down three reasons why Dividend Aristocrats could help your portfolio weather challenging conditions and prosper over the long term. Read on to see why stocking up on top dividend-paying companies could be a smart move in the current climate.
Real returns when you need them most
Daniel Foelber: Bear markets are brutal enough. If a bear market coincides with a weakening economy, rising unemployment, and declining asset values in other categories like bonds and real estate, the impact is far worse. We don't know how bad this bear market will get. But we do know that bear markets have historically been some of the best buying opportunities.
I'm a big believer in acknowledging and respecting the emotional and psychological sides of investing. We are all human. No matter how often we hear that it's a mistake to sell good companies on sale, there's no denying that it takes nerves of steel to hold through tough times. But those that held through past crashes reaped returns that far exceeded the price of their patience. Time is an investor's best friend. And compound interest is the greatest tool the retail investor has at their disposal.
There are few reprieves in a bear market. One of the best is generating passive income from dividend stocks. During a bear market, your assets may be worth less on paper. But if you don't sell them, that loss is unrealized. However, what can be realized is income from dividend stocks. In this vein, an investor can produce real gains without having to sell stocks for a loss.
Many Dividend Aristocrats have yields close to 3% or even above 3% -- which is a sizable return for doing nothing. One of the best feelings is to persevere through a bear market without selling at a loss, all the while collecting income from dividend stocks. In short, collecting dividends can be just the morale boost you need to hold tight and let long-term investment theses play out.
It sounds counterintuitive. But an investor's goal in a bear market shouldn't be to try to make money this year or next year. It should be to do everything you possibly can to position yourself so that you can make money over the next 10 years, 20 years, and beyond. Collecting passive income from dividend stocks cushions the bear market's blow, and can be just the antidote your portfolio needs to reduce the pressure to sell stocks at a bad time.
Here's when the "aristocrat" qualification really starts to count
James Brumley: To follow up on Daniel's point, I'd just like to add that these dividend-paying stalwarts aren't just attractive in tough environments because a little dividend income now is better than riding growth stocks lower. Most Dividend Aristocrats are operating within industries that allow them to continue raising their dividends despite the lousy economic environment. Even the tiniest of dividend growth potential means so much more when there are so few other ways to reliably make money in the stock market.
Take Walmart (WMT 0.52%) as an example. While it hardly soared back in the wake of the 2008 subprime mortgage meltdown, it did move higher at a time when nearly every other stock was getting crushed.
A great deal of that performance has to reflect the fact that Walmart sells what consumers have to have rather than what consumers merely want. I have to think, however, another key driver of this stock's performance just stems from the fact that the company was willing and able to maintain its dividend growth. There's no reason to think investors won't appreciate the little things like this all the more should we slip into a bear market as a result of too much economic weakness.
Sturdy dividend payers have earned their reputations
Keith Noonan: In order for a company to have increased its dividend annually for 25 years running, it has to be doing something right. The current class of Dividend Aristocrats has delivered consistent payout growth through the dot-com bubble bursting and resulting bear market in the early 2000s, the 2008 financial crisis and market crash, and the subsequent global recession. They've done it through multiple wars, shifting economic and geopolitical conditions, pandemics, and other challenges.
What's more, many companies on the Dividend Aristocrat list have payout growth streaks extending well beyond a quarter of a century. To continue with the Walmart example, the retail giant has increased its annual distribution for 49 years running -- putting it just one year shy of the 50 years of payout growth needed to join the ranks of the Dividend Kings.
Most recently, investor focus has been concentrated on negative impacts Walmart is facing from high shipping costs and other inflationary pressures, and that's admittedly caused a significant pullback for the company's valuation.
On the other hand, Walmart will likely be a go-to shopping destination if consumers continue to become increasingly cost conscious, and it has a proven track record of persevering through challenging economic conditions -- including stagflation in the 1970s and even higher inflation in the early 1980s. Other Dividend Aristocrats including Johnson & Johnson, Colgate-Palmolive, and Procter & Gamble also managed to continue increasing the size of checks cut to shareholders through these conditions -- and they've generally been safe, dependable stocks for long-term investors. These companies weren't completely immune to negative pressures of the day, but they had scale and infrastructure advantages that added sturdiness and, in some cases, opened the door for market share gains during hard times.
Of course, past performance doesn't guarantee future results, but it's reasonable to think that many of the same characteristics that helped large, dividend-paying companies post relatively strong performance in past bear markets will also be advantageous going forward.