S&P 500 Dividend Aristocrats: Past, Present and Future

The S&P 500 Index includes some of the biggest and best known companies in the world and most pay dividends. A few years ago, S&P wanted to pull out those with the best track records for not only paying dividends, but increasing dividends over the years. They set a tough standard to filter out the best. Each company was required to have a minimum of 25 consecutive years of paying higher dividends. While the number of companies fluctuate a little from year to year, about 60 (roughly 11%) are currently S&P Dividend Aristocrats. Most have track records of 30, 40 or even 50+ consecutive years of paying higher dividends annually.

Since each company has an outstanding long term track record of paying dividends, this group can be used to obtain investment ideas. Such help is more important than ever after the pummeling virtually all stocks have taken in recent months.

However, care is always needed when selecting investments, even in this elite group, Of the seven banks in the group in 2005, only two remain. The most famous was Bank of America (BAC), which bragged in annual reports about its track record of raising dividends over the prior 30 years. Last year in Q3, instead of increasing the dividend, BAC merely mentioned declaring a regular dividend. In Q4, the dividend was cut in half. This year, on greater fears about the company and its dividend, sellers took the stock into single digits. The fears proved correct when BAC just cut their quarterly dividend to only one penny.

A few other companies have had their streak of higher dividends come to an end, but their numbers have been limited. One example, ConAgra (CAG), cut the dividend a couple of years ago. However, the stock has not sold off as badly as others in the recent market decline.

A few stocks in the group are facing difficulties. The most prominent is General Electric (GE), selling at a 15 year low. After recent problems in its businesses, especially the financial ones, General Electric has been talking about only maintaining the dividend, not increasing it. Earnings will be reported later this week. Fears of dismal earnings have caused the stock to sell off to under 14.

Pfizer (PFE) and Eli Lilly (LLY) are drug companies facing patent expiration on important drugs shortly, which could impair their ability to increase dividends. Masco (MAS) may see its 50 year track record of higher dividends come to an end in 2009 as their business selling to the housing industry is not earning the dividend. These companies have extraordinary yields of 6-9%, reflecting doubts about future.

But most companies have healthy balance sheets and good cash flows with excellent track records for increasing dividends. Just a few of the big names in the group that I like for no particular reason include:

• 3M (MMM)
• Coca Cola (KO)
• Exxon Mobil (XOM)
• Johnson & Johnson (JNJ)
• Kimberley-Clark (KMB)
• McDonald's (MCD)
• McGraw-Hill (MHP)
• Procter & Gamble (PG)
• Stanley Works (SWK)
• VF Corp (VFC)
• Walgreen (WAG)
• Wal-Mart (WMT)

The recent fall in the stock market reinforces the age old advice "investigate before you invest," even for this very special group. The strong should survive and thrive over the long term. For example, I bought KO for my IRS 15 years ago. The stock has more than doubled the original price and reinvested dividends bring the total investment to almost triple. Almost 10 years ago I bought VFC which, again, has doubled the original price with reinvested dividends, bringing the total to almost triple. And today's valuations are held back because they are based on depressed market prices. Let Dividend Aristocrats provide helpful investment ideas for very smart investing.

Disclosure: Author holds long positions in KO, VFC

Comments

[prudentinve...:]

I had a position in KO for some years and was satisfied with the stock's performance. However, when it got to the mid-60's, I thought it was much too high and sold it and bought higher yielding stocks instead.

Part of my reasoning was that the novelty of people buying bottled water, instead of drinking it from a tap or fountain, will fade because (a) unnecessary spending in a recession,(b) articles in various media claimed that bottled water is no better than tap water, (c) uses lots of energy to make bottles and transport them, and (d) it was a silly fad anyway.

I confess I did not look into what percentage of KO profits came from selling water in bottles, but assumed it is significant as you see their water everywhere, and being more expensive than coke must be highly profitable.

Jan 21 08:18 AM

[Ishortyou:]

just drink tap water if you dont have the money, there is not studies that show that bottle water is better for your health than tap water, unless those studies are made and show beyond doubt that thats the case just save money and drink tap water.

Jan 21 08:36 AM

[nyka:]

Yawn, yawn. So, what's the point?

Jan 21 11:37 AM

[consumerons...:]

Bottled water? I wonder how many addicts like me there are who rarely drink anything but their favorite brand of pop. Hey, I just quit smoking. But I don't see myself ever giving up my diet Mountain Dew. Not gonna happen.

Jan 21 03:34 PM

[donzelion:]

Concur that dividend aristocrats offer an excellent starting place for future research. Also concur that certain dividend aristocrats offer much healthier dividend prospects than others.

But I'm torn as to tactics: on the one hand, Dividend Aristocratish ETFs (PFM, VIG, others) seem like the best option - when the dividend cuts, the stock is dropped from the index, and I don't have to trade anything. I can get em all without paying trading costs. That said, IF I buy the more promising dividend stocks based on my judgment, I can avoid long-term dividend achievers that seem over valued (KO, and all the banks as of late 2007).

Guess the judgment comes down to, if I think I'm smarter than the market, pick my winners, but if not, buy the ETFs with lowest fees. I think I've got a decent education, but I'm pretty darn sure I'm not smarter than the market...

Jan 22 01:10 AM