The Shrinking Universe of Dividend Aristocrats

Given the difficult economic environment, stocks of companies that pay a dividend have increasingly elected to reduce or eliminate dividends in order to conserve cash.

S&P reports actual first quarter dividend payments for companies in the S&P 500 Index were down 15.99% and this is the worst rate of decline since the -24.44% decline in the third quarter of 1958. David Blitzer, chairman of S&P's index committee, indicates S&P may need to loosen the criteria used to judge whether companies qualify for the Aristocrats Index. The big hurdle is a company has to have demonstrated annual increases in the dividend for at least 25 years.

S&P makes adjustments to the Aristocrats Index in December and only companies that paid more this year compared with 2008 will be retained. S&P's Aristocrats list currently contains 52 companies. Based on dividend cuts by some of the Aristocrats and "no increase" by companies in 2008, the potential list of firms that will be eligible for the index could fall below 40. This would be the lowest number of firms since 1992.

The 2009 Dividend Aristocrats list is detailed below.

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Bloomberg reports,

The Dividend Aristocrats Index returned an annualized 9.1 percent a year since 1989, compared with 6.6 percent for the S&P 500 Index, the main benchmark for American equities. It lost as much as 49 percent from its 2007 peak, while investors in the S&P 500 retreated as much as 57 percent." In spite of the fact the markets have declined by a significant amount, the Aristocrats have outperformed the S&P 500 Index.

Consequently, I believe S&P should not reduce the criteria used to determine the eligibility of companies for the Aristocrats membership. Companies that can increase their dividend every year over at least 25 years tend to be firms that have or project a strong earnings and cash flow profile. In the end it isn't the number of stocks you own, but owning the right stocks.

S&P ‘Dividend Aristocrats’ Dwindle as Payouts Are Cut
Bloomberg
By:

Elizabeth Stanton

April 2, 2009

Comments

[schazd:]

ADM should continue to flourish as demand for processed grain and alternative fuels increase.

Apr 04 09:38 AM

[CitizenPat:]

Great article. I totally agree on holding the line on the criteria. Being an Aristocrat means being able to weather tough times. Companies that can't shouldn't be given a break and should be dropped from the list.

Apr 04 10:27 AM

[ECONOMICS 101:]

the word aristocrat is perfect for these companies..top drawer products and for the most part excellent management..the best of breed always survive to fight another day..bigger,better and stronger

Apr 04 11:00 AM

[Rob Viglione:]

When times are tough rational agents reduce expenditures, work harder, and conserve cash. Rational companies in this environment should reign in dividend payments, hoard reserves, and take advantage of competitive weaknesses in their product markets.

The bad companies are the ones that attempt to retain dividend levels for show, or for the sake of it. Be careful of this sort of irresponsible management.

When analyzing dividend yields for long-term investors, try to think about how the company will emerge from the downturn. If stronger, or generally in tact, consider pre-downturn dividend streams in your calculations.

Apr 04 01:49 PM

[notsosmart:]

do the bod's & ceo's reduce their incomes as the div. are reduced?

Apr 04 02:07 PM

[TimR:]

I agree - the depths of a recession is not the time to make changes to a list like this. This is not a time to "dumb down" an index that is helpful and useful because it has strict and specific criteria.

Apr 04 02:29 PM

[ECONOMICS 101:]

They are called aristocrats for a reason

Apr 04 02:56 PM

[ECONOMICS 101:]

They are called aristocrats for a reason

Apr 04 02:58 PM

[Tmacc:]

If anything, buying stocks for the expected dividend is a fools game. XOM's rang was from 56 to 96 in the last 12 months. XOM may never reach that high again leaving the fool that bought at 96 holding an empty bag. There was a time when equties paid out more than bonds. What ever happened to that? Dividends were sacrificed for growth; now investors have neither. This is the new age. The playing field is leveling in favor of the world markets to the detriment of US employees. Americans are in survival mode. Congress will see to that. Today we have a false economy...until the money runs out and the debt service is greater than the GNP. What then? Create more? The Market is an ellusion of wealth....ask any home owner!

Apr 05 11:07 AM

[David Van K...:]

The whole point of having a list like S&P's Dividend Aristocrats is to highlight those companies that have been able to weather a variety of economic conditions for many years while still increasing their dividends every year. Just because economic conditions got really tough in 2008-2009, leading some companies to cut their dividends, is no reason for S&P to change its standards for inclusion. There is no magic size that the list ought to be. If it falls to 40 or below, fine. It still stands for a certain standard of achievement.

Some investors purchase stocks specifically for income, and they use lists like the Dividend Aristocrats to help them find reliable dividend payers and dividend raisers. Well over half of the dividend cuts in late 2008 and early 2009 have come from banks. Well, most people would say that those banks did themselves in by engaging in high-risk speculation. That's just the sort of activity that an income-seeking retiree wants to avoid. Those banks, in effect, took themselves off the list. S&P should not change its own standards just because that happened.

By the way, perhaps a better list is the one maintained by DripInvesting.org. They call their list Dividend Champions. It, too, contains stocks whose dividend payouts have increased for 25 consecutive years or more. The reasons I like it better: (1) It includes stocks that bump up their dividends every other year, so long as the total payout each year goes up (this is a subtle distinction, but I think the goal of a dividend investor is to find stocks whose annual payout goes up); (2) they update their list every month; (3) they include useful notes and explanations; and (4) they have a supplement showing stocks whose payout has gone up for the past 20 years or more, i.e., stocks who are poised to make the 25-year list.

Their list can be found at www.dripinvesting.org/ under Info/Forms/Tools.

Apr 05 04:57 PM