A dividend aristocrat is a member of the S&P 500 that has raised dividends for the past consecutive 25 years. The firms are beloved by income-focused investors because of the regular dividends that they provide. They also tend to have relatively solid returns. The ProShares ETF that tracks the firms has had a total return of more than 50% in the past five years.

Dividend aristocrats vs S&P 500

Dividend aristocrats vs S&P 500

The aristocrats have underperformed the S&P 500 mostly because it does not have the technology firms like Apple and Amazon. In total, there are about 65 dividend aristocrats in the S&P that have a combined market cap of more than $1 trillion.

How to invest in dividend aristocrats

There are two main ways of investing in dividend aristocrat companies. You can invest in these companies directly through a broker like Robinhood, Interactive Brokers, and Schwab. Second, you can invest in an ETF that tracks the firms. A good example of this is the ProShares S&P 500 dividend aristocrat index (NOBL).

Ideally, there are several things you need to look at when investing in these companies:

Payout ratio – This metric shows the percentage of a company’s dividends against its earnings. A low payout ratio means that the firm can sustain the payouts for a longer period.

  • Dividend yield – It measures the amount of dividends and share buybacks that a company has paid to investors against its market cap. A high yield is usually a signal of risks in the firm.
  • Dividend growth – This is a measure of how a company’s dividend has grown over time.
  • Forward dividend yield – This is the yield that analysts expect the firm will attain in a certain period.
  • Revenue growth – While most of these firms have little or no growth, investing in those that have is an added advantage.

Best dividend aristocrats to invest in

Procter & Gamble (PG)

Procter & Gamble (P&G) is the biggest manufacturer of fast-moving consumer goods (FCMG) in the world. It has a market cap of more than $342 billion and annual revenue of more than $70 billion. It has a dividend yield of about 2.30% and a payout ratio of about 58%, which is slightly below the S&P 500 average of about 60%. Interestingly, the firm has increased its dividend in the past 63 years, which make it a dividend king. A dividend king is a company that has increased its dividend for the past 50 years.

P&G is an excellent firm to invest in for several reasons. First, it has some of the best-known brands in FCMG around the world. This includes products like Tide, Olay, Pampers, and Gillette. Second, the firm has better performance metrics than its key peers. For example, it has an EBIT margin of ~23%, which is slightly better than that of Kimberley-Clark and Unilever. Third, the firm has a healthy balance sheet with more than $16 billion in cash. Fourth, its earnings and revenues are growing faster than that of its close peers. Finally, the company operates in a relatively recession-proof industry.

S&P Global

S&P Global is a global financial services company that offers services like credit ratings, analytics, and indices. In indices, like the Dow Jones and S&P 500 are some of the widely-known in the industry. On ratings, it is a market leader that competes mostly by Moody’s and Fitch. The firm has a market cap of more than $84 billion, a dividend yield of 0.76%, and annual revenue of more than $6.7 billion. S&P Global has increased its dividends for the past 46 years.

There are several reasons why the firm makes a good investment. First, it has limited competition and has a wide moat. For example, it is almost impossible for one to start an alternative to its ratings and indices business. Second, it has some of the healthiest margins in the industry. It has a net income margin of about 36%. Third, the firm has a payout ratio of about 24%, which means that it can confidently cover its payouts for years to come. Fourth, like P&G, it operates in a recession-proof industry.

AT&T (T)

AT&T is one of the biggest telecommunications and media company in the US. It has a market value of more than $206 billion and more than $181 billion in annual revenue. The firm has increased its dividend for the past 30 consecutive years.

AT&T is a difficult company to recommend since it has a long-history of underperformance. Indeed, its stock has risen by just 17% in the past five years. It is also the most indebted company in the country, with more than $196 billion in debt. Most importantly, the company has recently invested heavily in online streaming and there is no guarantee that it will survive.

Still, there are several reasons why investing in the firm makes sense. First, it has a payout ratio of about 65%, which is high but comfortable. Couple this with its strong dividend yield of about 7%. Second, the company has been reducing its debt, which is a good thing. There’s talk that it will sell DirecTV and use the funds to pay the debt. Finally, the firm is relatively cheap, trading at a price-to-earnings ratio of about 8.

Automatic Data Processing (ADP)

ADP is the biggest business outsourcing services firm in the US with more than $58 billion in market cap. The firm serves more than 140,000 firms around the world, including Hyatt, ADT, and Eileen Fisher. It has more than $14 billion in annual revenue and a net income of more than $2 billion. Most importantly, it has been growing its revenue and profitability in the past few years. It has also increased its dividend in the past 45 years.

ADP is a good dividend aristocrat for several reasons. First, it has a substantial market share that is hard to challenge. Second, it has a payout ratio of about 72%, which is still manageable. Third, it has grown its EBITDA by about 10% in the past three years. Fourth, it has a strong balance sheet with more than $1.9 billion in cash and about $2.4 billion in total debt. Finally, it operates in a recession-proof industry.

Walmart (WMT)

Walmart is the biggest retailer in the US, with a valuation of more than $383 billion. It is a generous dividend payer having increased it for the past 46 consecutive years. The firm has a dividend yield of about 1.60% and a payout ratio of about 40%. That means that it can comfortably cover its dividends for a long time.

First, Walmart is a recession-proof company. Indeed, its stock has outperformed the overall market in the previous recessions. Second, its e-commerce division is growing faster, making it the main challenger to Amazon. Finally, Walmart is a strong brand that has a large moat in the physical retail industry.

Final thoughts

Dividend aristocrats are excellent companies to invest in, especially for long-term investors. While these firms don’t outperform the fast-growing growth tech companies, they offer quality and predictable returns. Other aristocrats we recommend are PepsiCo, Illinois Tool Works, Abbott Laboratories, and Target.