A dividend aristocrat is a blue chip stock that has increased its dividends every year for the last twenty-five years or more. Such securities tend to be dependable performers, because they are stocks of conservative companies with management that cares about shareholders.
Almost any dividend aristocrat is likely to be a good bet for a conservative investor who wants reliable returns. Knowing how to select dividend aristocrats for your portfolio, though, is a more difficult question.
As of 2012, Fifty-one stocks in the S&P 500 are qualified aristocrats. They range from well-known names like Wal-Mart(WMT) and AT&T(T) to less-known performers like Leggett & Platt (LEG). For most people though, 50 are too many stocks to watch.
Some people choose stocks that have a good track record. They might look at stock charts that go back three or five years(widely available on sites like moneycentral.com), and select stocks with charts that are proceeding from the lower left to the upper right. This may work, or it may promote stocks that are at the end of a run.
Others choose stocks that are depressed, with low price-to-earnings ratios and low price to book. Actually, not many choices like these are in the aristocrats, though. These stocks have recognized value. Perhaps the best way to look for value among aristocrats is to look for high yields, but then, low yields may be a sign that the dividend is about to rise. It’s a dilemma.
One way to own a few aristocrats is to ignore stock value comparisons between these blue chips. Instead, choose five (or ten) stocks in diverse areas of the market. That way, if something happens to damage the prospects of one selection, the others will probably not be affected. To follow this plan, first choose diverse categories like energy, consumer non-durables, health care, utilities, technology, consumer cyclicals, financials, and basic materials. Eliminate any category you dislike, but use at least five.
Then, choose stocks within each category from a dividend aristocrats list like this one from Forbes. Simply aim for the widest variety you can achieve. Do not choose only the names you have heard of though, some unknowns have produced wonderful returns for years. The point is a diversified selection of quality companies.
The easiest way
One alternative is to buy the S&P Dividend ETF, (SDY), which holds the highest yielding dividend aristocrats. The fund makes the choices, and holders collect the growing dividends. This ETF has low turnover, good tax treatment, and low costs.
Whether you choose the stocks yourself, or let an ETF choose them, these are probably stocks you can hold for years. Gradually increasing dividends should help fight inflation. They should also help cushion stock values when the market dips. The future is unknowable, but the dividend aristocrats may be one smart way to face it.