A stock portfolio of an investor is an important tool as it describes how diversified the investor’s stocks are at any given instance. Such portfolios will minimize the risks associated with it depending only on single units of stocks by spreading the investments into several stock units. Thus, even if one stock performs badly the other stocks have the ability to pick up and therefore minimize the losses. However, in order to make a stock portfolio diverse, secured, effective and attractive, one needs to include stocks of dividend aristocrats as well. This article will explain what a dividend aristocrat is, and how to choose such a stock from a diverse and vibrant stock market.
Definition of a dividend aristocrat
A company enlisted in the stock market, usually distributes a portion of its earnings decided by the company’s board of directors, to a class of its shareholders, each year. The term ‘dividend’ is used to describe this distribution and usually it is presented as a dollar value, a dividend payout ratio or as a dividend yield.
According to literature, a dividend aristocrat is a company, which increased the amount of dividends it pays to its shareholders continuously for at least 25 years. At the same time, the company should have maintained a dividends policy, which increased its dividends every year for the past 25 years. As such, companies, which were able to maintain high dividends throughout its existence, should be considered ‘stable’ and are a rarity in any stock market.
The reason for companies not being able to maintain high dividends is that they encounter recessions and market shocks. Companies which are considered to be dividend aristocrats have weathered these market downturns successfully.
The standard and Poor’s 500 Index
Although many investors think that finding dividend aristocrats is a professional’s job, the Standard and Poor’s 500 index provides an easy way for anyone to quickly recognize whether a particular company is considered a dividend aristocrat. According to the index better known as the ‘S&P 500’, it measures “….the performance of large cap, blue chip companies within the S&P 500 that have followed a policy of increasing dividends every year for at least 25 consecutive years.” Each year, the index get updated and some companies which were not included earlier might find their way in while some companies which failed to maintain a growing dividend will exit from the list.
At present, there are more than 50 companies included in this list. Thus, it should not be difficult for a new investor to glance through the index and find which dividend aristocrats should be included in his or her stock portfolio.
However, analysts caution on using only a single dividend aristocrats list when making an investment decision as there are several other indexes, which also describes similar companies. These are the US Broad Dividend Achievers Index and the U.S. Dividend Champions.
Although what was described in this article is the easiest way to find out about dividend aristocrats, one should not depend only on the indexes to make an investment decision. While consulting several other dividend aristocrat indexes, investors should also research market volatility, business strategy as well as the company’s vision among many other things to finalize such decisions.