Marcus Tuck

There’s a select group of stocks that belong to a very exclusive club. To qualify for membership, they have to have increased dividends every year for the last 25 years. Standard & Poor's refers to them as 'Dividend Aristocrats'. Very few companies in the world, and virtually none in Australia measure up to that requirement. Of those that do, most are found in the US or Europe. Elsewhere in the world, the lesser standard of increasing or stable dividends for at least ten years is usually applied. S&P has constructed the S&P 500 Dividend Aristocrats index that contains equally-weighted holdings of S&P 500 companies that have increased dividends every year for the last 25 years (around 50 companies). An investment in that strategy has delivered a total return of 11.5% p.a. over the past ten years, outperforming the S&P 500 benchmark return of 8.1% p.a. In the article below, I look at the performance and make-up of the strategy. Also includes perhaps the closest example of an Australian Dividend Aristocrat.

This strategy should not be confused with alternative "yield" or "high yield" equity ETFs that might invest in high-yielding stocks that typically do not have the ability to grow the dividend on a consistent basis over time.

Since 1926 dividends have contributed nearly one-third of total equity returns, with capital gains making up the rest. Unlike strategies that focus on high dividend yields, which typically come from the financials and utility sectors, this alternative approach is more diversified across other sectors. The sectors most represented in the US S&P 500 Dividend Aristocrats index are Consumer Staples (27.0%), Industrials (15.8%), Health Care (13.9%), Financials (11.8%) and Consumer Discretionary (11.5%).

The starting yield on a Dividend Aristocrat stock may not be high but, because of the stock's ability to grow the dividend year after year, the yield based on your purchase price becomes higher and higher each year.

That is far more preferable than buying a high-yielding stock now only to find that the yield was temporary (or illusory) because the dividend had to be cut.

Stocks that can consistently grow their dividends tend to have other benefits as well. They are typically less volatile, generate good free cash flow and experience good capital growth over time.

For those who prefer to own individual stocks rather than using an index approach, the individual Aristocrat stock constituents are a good universe to go hunting in.

Among the 50 or so US Dividend Aristocrat stocks are some familiar names such as 3M Company (MMM), Abbott Laboratories (ABT), AT&T (T), Colgate-Palmolive (CL), Illinois Tool Works (ITW), Johnson & Johnson (JNJ), Kimberly-Clark (KMB), McDonald's (MCD), Medtronic (MDT), PepsiCo (PEP), Proctor & Gamble (PG), Walmart (WMT) and Walgreen Boots Alliance (WBA).

Less well known Dividend Aristocrats include Air Products & Chemicals (APD - industrial gases), Becton Dickinson (BDX - medical equipment), Bemis Company (BMS - packaging), C.R. Bard (BCR - medical equipment), Ecolab Inc (ECL - sanitation), Leggett & Platt (LEG - inner springs), Sysco Corporation (SYY - food distribution) and Sherwin-Williams (SHW - paint).

Even S&P Global (formally known as McGraw Hill Financial, SPGI), which owns the Dividend Aristocrat index, is a member of its own exclusive club.

Perhaps the closest example of an Australian Dividend Aristocrat, under the softer definition of increasing or stable dividends for at least ten years, would be Ramsay Health Care (RHC). With a dividend yield under 2%, it is far from being a high-yielding stock, but it has an excellent track record of consistently growing its dividend and delivering capital growth. When the late Paul Ramsay left a $3.3 billion bequest of RHC shares to his charitable foundation, the $55 million per annum (and growing) of dividends is the gift that keeps on giving.

This article was contributed by Mason Stevens: (VIEW LINK)


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Mike King

You forgot Soul Pattinson (ASX:SOL). It has paid a stable and growing dividend ever since it listed more than 100 years ago.

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James Marlay

We're having a debate about other potential candidates for the list... Interested to hear thoughts from any readers. Invocare (ASX:IVC)??

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Wayne Jones

I would have thought AP Eagers (APE), ARB Corporation (ARB) and Reece (REH) would all be candidates along with some of the traditional LIC's with long track records.

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Peter Murch

One of the great investments is dual listed on NZ & AUS exchanges - Infratil - IFT Having been listed for 22 years their growth and dividends equates to an average return of 18% per year.

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