Nowadays, everyone wants stocks that pay dividends -- especially dividends that have grown throughout a company's history. But before you pick a stock simply because of its dividend history, take a closer look; not every such stock makes a good investment.
Putting together a dividend track record
When it comes to well-established dividend stocks, few honors are more prestigious than making Standard & Poor's Dividend Aristocrats list. In order to qualify as a Dividend Aristocrat, a company has to increase the dividend on its stock every year for at least 25 years. A single misstep can ruin a decades-long good reputation, as General Electric and Pfizer discovered when they were taken off the list in 2010.
You might think that once a company makes the list, it's automatically a good candidate for someone interested in a strong dividend stock. But if you simply buy the whole list -- or rely on the SPDR S&P Dividend ETF
Let's take a look at a few of the surprising things about some of the stocks on the Dividend Aristocrats list.
1. Not all Dividend Aristocrats have high yields.
You'd think that after 25 years of raising dividends, a stock would have a pretty high yield. But there's no requirement that a Dividend Aristocrat pay a certain minimum amount in dividends.
For instance, disposable medical products manufacturer C.R. Bard
In contrast, specialty chemical maker Sigma-Aldrich
Past share appreciation is great for longtime shareholders, but it doesn't help you if you're buying now. If you want high yield, don't assume just any stock on the list will give it to you.
2. Not all Dividend Aristocrats are growing their dividends quickly.
Low yields aren't the only unexpected surprise you'll sometimes get with Dividend Aristocrats. Some members of the exclusive club have much slower dividend growth rates than you might expect. Again, there's no requirement for a minimum amount by which a company has to increase its dividend -- only that it must do so once a year.
That leads to some situations in which any dividend increases are insignificant. Consolidated Edison
3. Not all Dividend Aristocrats have healthy payout ratios.
One key to sustainable dividend growth is keeping dividends as a manageable percentage of net income, known as the payout ratio. A low payout ratio makes it easy for companies to increase dividends without exhausting profits.
Even some Dividend Aristocrats don't score well by this measure. Stanley Black & Decker
It's convenient to turn to a ready-made list like the Dividend Aristocrats to help you come up with investment ideas. But don't simply take being on the list as a recommendation in itself. Often, you'll find stocks on lists that don't have the characteristics you really want.
Is stock picking dead? Matt Koppenheffer doesn't think so.
True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community.
Fool contributor Dan Caplinger believes in investors' inalienable rights. He doesn't own shares of the companies mentioned in this article. Pfizer is a Motley Fool Inside Value selection. The Fool's disclosure policy declares independence from bias.
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