Are Dividend Aristocrats Safe?

Are Dividend Aristocrats Safe? Some investors are after the next big thing, gambling that they can choose stocks that will achieve massive growth in a relatively short period. It’s a risky strategy, but when it works, the rewards can be astonishing. However, the possibility of losing big is always present, which is a bit too much anxiety for most investors. 

Instead, the more cautious folks might devote a small portion of their portfolios to start-ups, entrepreneurs, and innovators. The rest is balanced among more stable assets – those that have a long track record of reliable growth. 

Let’s see how to go about doing just that using dividend aristocrats. What are they and are they safe?

Why Stable Companies Are Sexy

The best part about investing in established companies is that many offer something more than a gradual increase in the value of their shares. They pay out a portion of their profits to investors in cash through periodic dividends. This is an important benefit for investors who are looking for additional sources of income.

The caveat to choosing companies for their dividends is that dividends aren’t guaranteed. An economic downturn or a change in profitability can reduce the amount of shareholder payouts or eliminate them altogether. For example, many investors were disappointed when the COVID-19 pandemic pushed a long list of companies to freeze, reduce, or suspend dividends. 

The disappointment was more pronounced among those with investments in companies long considered to be a reliable source of cash. For example, Wells Fargo’s dividend went from $0.31 per share to $0.10 per share, and Goodyear (GT) suspended its $0.16 per share payout altogether.  

Boeing (BA) suspended its dividends, too, which was more upsetting for investors given the loss amounted to $8.22 per share.

Those that rely on investment income are selling shares of less stable companies in favor of the prestigious Dividend Aristocrats. However, given current economic conditions, some wonder are Dividend Aristocrats safe? 

What Are Dividend Aristocrats?

There is a small club of established companies that stand out from their S&P 500 peers. This group is known as the Dividend Aristocrats and includes just 65 members in 2020.

The Dividend Aristocrats win their designation by meeting the following criteria: 

• Currently included in the S&P 500
• Market cap of $3 billion or more 
• Paid a dividend each year for 25 or more consecutive years
• Increased its base dividend for at least 25 consecutive years 

Dividend aristocrats are popular among income investors, because they promise stable income over time. Examples include 3M, Coca Cola, Colgate-Palmolive, and Emerson Electric, all of whom have increased dividends for 57 consecutive years.

Are Dividend Aristocrats Safe?

As with any investment, there are no guarantees, and past performance is not necessarily indicative of future results. While Dividend Aristocrats boast a quarter-century or more of consecutive payout increases, a change in market conditions could bring that pattern to an abrupt halt. 

For example ExxonMobil (XOM) faces unprecedented challenges in a year when oil prices went negative, and its 37-year dividend streak could be at risk.

The same goes for Leggett & Platt (LEG) which makes components for furniture and bedding and boasts 48 years of increasing payouts. When consumers cut down on discretionary spending, furniture purchases are some of the first to go. 

Of greater concern is the Dividend Aristocrats that don’t cut their payouts, but should. In an effort to retain their Aristocrat status, they continue to pay increasing dividends, though the payouts aren’t supported by the company’s financial state.

That means a weaker company with less cash available to reinvest in stabilizing and growing the business. 

With that said, a long history of increasing dividend payouts shows commitment from business leaders. When you choose to invest in one of the Dividend Aristocrats, you can be sure that reducing or eliminating shareholder payments will only be considered as a last resort in a crisis.

From that perspective, Dividend Aristocrats are comparatively safe, though it is critical to put the same amount of care into researching and selecting Dividend Aristocrats’ shares as you would any other stock trade. 

Which Aristocrats Pay Highest Dividends?

There are two ways to compare dividend payouts between companies. The first is dividend yield. This is the ratio between the size of a company’s dividend and its stock price. You can calculate dividend yield by dividing the dollar amount of the dividend by the value of related stock.

For example, AT&T (T) has one of the highest dividend yields available today. As of October 1st, its payout of $2.08. When divided by its share price of $28.49, that means a dividend yield of 7.30 percent. That’s impressive given the average dividend yield for the S&P 500 hovers around 1.77 percent. 

You can also look at dividends from an absolute dollar amount perspective. In that case, a company like Essex Property Trust (ESS) comes out on top with its dividend payout of $8.31 per share.

However, for the purpose of generating income, this isn’t particularly helpful. With Essex Property Trust shares trading around $206 each, your initial investment to get that $8.31 per share is quite high. Essex Property Trust currently has a dividend yield of roughly 4 percent. 

In other words, looking at which Aristocrats pay the highest dividends isn’t the best strategy for maximizing your income. Instead, look for the best dividend yields, then carefully consider whether those yields are sustainable in the current market.

If not, move on to the next-highest and so forth, until you have identified a diverse, reliable mix for your portfolio. 

Can You Live Off of Dividends?

Many investors dream of developing a portfolio that offers enough reliable income to support their lifestyles. That means early retirement from the traditional workforce, and the financial freedom to pursue personal passions.

The key to this, of course, is owning enough shares of companies with reliable dividend payouts to generate a level of income that can cover your living expenses. 

Some investors can live off of dividends, but there is no guarantee that your portfolio will deliver the income you need long-term. While Dividend Aristocrats are most likely to deliver regular increases and reliable payouts, changes in their financial situation or the larger economy can disrupt these plans. 

In short, you can certainly work towards the goal of living off of dividends, but make sure you have a backup plan. Know what you will do if a situation comes up in which one or more of the companies in your portfolio falls off the Dividend Aristocrats list. 

Best Dividend Aristocrats: The Bottom Line 

Choosing the best dividend aristocrats for income investors comes down to current market conditions. In times of certainty, you can confidently buy shares in the companies with the highest yields.

However, that isn’t the right strategy given 2020’s volatility and likely ups and downs that will come with the election and a potential second wave of coronavirus cases. 

For the moment, the best Dividend Aristocrats to buy are those that can survive and even thrive in the current environment. For example, insurer Chubb (CB) offers a diverse product mix that includes a number of must-haves for consumers and businesses.

No matter what the larger market is doing, no one is willing to forgo protection from liability, so Chubb is likely in a solid position to continue building on its 27 years of increasing dividend payouts. 

PepsiCo (PEP) is another company that can maintain its dividend streak (48 consecutive years to date), particularly now that it has moved beyond beverages to a variety of snack foods.

Even when COVID-related shutdowns disrupted supply and distribution chains, PepsiCo (PEP) was able to adapt. It is now selling packages with customized product mixes directly to consumers. 

Finally, Lowe’s (LOW) is a popular choice among income investors, because it is so resilient. When Home Depot (HD) was forced to put a hold on dividend increases during the Great Recession, Lowe’s continued to reward shareholders, maintaining its 45-year streak. 

This was made possible by Lowe’s more cautious approach to dividends. Instead of competing with Home Depot (HD) to payout the highest yield, Lowe’s elected a dividend strategy that could be sustained.

Home Depot (HD) targets a payout of 55 percent of earnings, and Lowe’s (LOW) stays closer to 35 percent, which means there is a greater likelihood that it will continue to pay dividends regardless of market conditions. 

These are three examples of the best dividend aristocrats for investors who want to protect their income, but they aren’t the only smart options in today’s market. When considering Dividend Aristocrats, consider current financial strength, share price value, and the organization’s ability to flex and adapt to rapid changes in the economic environment. 

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.