S&P 500 Dividend Aristocrats: Withstanding the Test of Time

Portfolio income has become increasingly important as stocks have gone through one of the worst market declines since the Great Depression. These difficult times may require significant base building before markets resume an upward climb. The S&P 500 Dividend Aristocrat list is of 59 companies from the S&P 500 with dividend payments that have withstood the test of time. To be included, companies in the S&P 500 need a track record of at least 25 years consecutive years of higher dividend payments. Many have track records of 30-50 years and more.

Prominent members include:

• 3M (MMM)
• Coca Cola (KO)
• Johnson & Johnson (JNJ)
• Kimberly-Clark (KMB)
• McDonald's (MCD)
• Procter & Gamble (PG)
• Target (TGT)
• Wal-Mart (WMT)
• Walgreens (WAG)

The best record is held by Stanley Works (SWK), which has paid a cash dividend for 132 consecutive years, increasing the dividend in each of the last 41 years. By way of contrast, widely known companies NOT on the list include:

• American Express (AXP)
• Caterpillar (CAT)
• Chevron (CVX)
• DuPont (DD)
• IBM (IBM)

While long term track records are excellent guides for investment, care is always needed before investing. Today there is an extra emphasis since all dividends are under a cloud. Companies are dropped from the group if their dividend is not increased in just one year. ConAgra (CAG) reduced the dividend a couple of years ago (although the stock has held up relatively well following the dividend cut), taking it off the list.

Banks deserve special mention. Of the 7 surviving banks in this group from 2005, only 2 remain:

• State Street (STT)
• US Bancorp (USB)

Higher yield companies in the group include Pfizer (PFE) and Masco (MAS) with yields over 8%, while General Electric (GE) and Eli Lilly (LLY) have yields over 6%, all Dividend Aristocrats. Higher than traditional yields suggest a fair amount of risk is being priced into each dividend. Recently, Bank of America (BAC) had the highest yield in the group for a good reason as the latest dividend was cut 50%. However, other companies in the group with high but more traditional kind of yields of 2-5+% which should be well covered by their earnings.

Standard & Poor's has not been listing names in the group for the last couple of years, but lists from last year can be found on the web. New companies are added to the group after attaining a 25 year track record. For example, last year Dow stock Exxon Mobil (XOM) joined the group. This list of Dividend Aristocrats can be used to select companies appropriate for investment. A company's annual report will give their track record of dividends plus should give an indication about yearly in coming years.

Over the years, dividends have supplied one-third of appreciation with capital appreciation providing the remainder. Going forward, that ratio may change so that dividends will provide two-thirds or more of investment gains. The adventuresome may want to buy some of the higher yielding securities for extra income. But even companies without major additional risk issues, providing yields of 3-6%, can be helpful for an investor in getting through today's troublesome markets. The Dividend Aristocrats provide companies with outstanding records for raising dividends and should be used as a key source for selecting new investments. Companies with well covered dividends in the group provide useful ideas for very smart investing.

Disclosure: Author holds a long position in KO

Comments

[bobbobwhite:]

Way too conservative for me, and yields of only 3-6% do not compensate for the huge risks of the stock market. If I anticipated only those yields, I would keep my money in safer bonds, CDs or MMF and totally out of the market.

Being too protective guarantees mediocre overall performance.

2008 Oct 27 12:16 PM

[nym:]

So GE sold preferreds with 10% yield to Buffett so they can continue paying dividends. This cult of ever-increasing dividends sounds like a shell game to me.

2008 Oct 27 12:30 PM

[No Free Cake:]

BobBob, you forget that the yield from stocks typically rise along with the rising stock price so it beats or keeps pace with inflation. Bonds, CDs, and MMF may have a similar yield - but no price appreciation to help with inflation.

2008 Oct 27 12:59 PM

[anarchist:]

No Free Cake I think you are assuming a lot thinking that there is going to be any significant rise in stock prices after this crash. History tells us that after a crash it takes at least 10 to 13 years for a market recovery. We could even go into stagflation like the Japanese for years and years. Short term treasuries are almost 0% interest when considering inflation (even the way the government calculates it) and the herd is flocking to buy them. The financial situation gets crazier every day as we enter a recession that no one can deny so fear and panic is in the air-I smell it in the news read, I see it in the red ink on the markets.

2008 Oct 27 07:24 PM

[nyka:]

Banks pay more on deposits, making your list valueless.

2008 Oct 29 07:58 PM

[mkreisel:]

What a funny comment! When inflation finally strikes, your bank CD will soon become worthless.

Anyone who bought a bank CD in continental Europe in 1914 were completely wiped out by 1945.

Buyers of decent equities, however, completely recovered by 1955 and went on to new glories.

2008 Oct 31 03:36 AM