S&P 500 Dividend Aristocrats and Your Portfolio

by: Avi Morris

Portfolio income has become increasingly important after stocks have gone through one of the worst market declines since the depression. These difficult times may require significant base building for stocks before markets resume an upward climb. The S&P 500 Dividend Aristocrats include 59 companies from the S&P 500 with dividend payments that have withstood the test of time. To be included, companies 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:

Price Dividend EPS

3M (NYSE:MMM)......................64.83 2.00 5.29
Coca Cola (NYSE:KO)...............46.25 1.52 2.57
Exxon Mobil (NYSE:XOM)....................74.00 1.60 9.26
Johnson & Johnson (NYSE:JNJ)..60.22 1.84 4.42
Kimberly-Clark (NYSE:KMB) ......57.94 2.32 4.10
Procter & Gamble (NYSE:PG). ...64.49 1.60 3.64
VF Corp (NYSE:VFC).................51.64 2.36 5.83
Walgreens (WAG)............23.88 0.45 2.17

(numbers supplied by Yahoo, EPS is trailing 12 months)

The best record for an S&P 500 Dividend Aristocrat is held by Stanley Works (NYSE:SWK) which has paid a cash dividend for 132 consecutive years, increasing the dividend for 41 years straight. By way of contrast, widely known companies NOT in the S&P 500 Dividend Aristocrats include:

American Express (NYSE:AXP)
Caterpillar (NYSE:CAT)
Chevron (NYSE:CVX)
DuPont (NYSE:DD)

While long term track records are excellent guides for investment, care is always needed before investing. Today extra emphasis is required since all dividends are under a cloud. Companies are dropped from the group when their dividend is not increased in just one year. ConAgra (NYSE: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 from 2005, only 2 remain:

State Street (NYSE:STT)
US Bancorp (NYSE:USB)

Higher yield companies in the group include: Pfizer (NYSE:PFE), Masco (NYSE:MAS), General Electric (NYSE:GE) and Eli Lilly (NYSE:LLY). Such yields suggest a fair amount of risk is being priced into those dividends. Masco yields over 10% as investors are not impressed with a 50 year track record of increasing dividends, instead focusing on the inability for earnings to cover the dividend. GE will not be increasing dividends given financial problems they face. Recently Bank of America (NYSE:BAC) had the highest yield in the group for a good reason, the Q4 dividend was cut 50%. However, stocks of companies in the group with high but more traditional yields (2-5+%) with well covered dividends should hold up better while markets are going through a long period of turmoil.

Standard & Poor's has not been providing lists for the group in the last couple of years, but lists can be found on the web. New companies after attaining a 25 year track record are added to the group. For example, last year Dow stock Exxon Mobil (XOM) joined the group. S&P 500 Dividend Aristocrats can be used to select companies offering attractive dividends for investment. A company's annual report will confirm their track record of dividends plus should give an indication about the future.

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 higher yielding securities for extra income. But even companies without major additional risks, providing yields of 3-6%, can be helpful to investors getting through these 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: Long KO and VFC.