Tuesday, February 26, 2013

S&P Dividend Aristocrats Index – An Incomplete List for Dividend Growth Investors

When I was first getting started with dividend growth investing, one of the biggest authorities on dividend investing was the S&P Dividend Aristocrats Index. This list of stocks was compiled by a respectable agency and included companies which had raised dividends for at least a quarter of a century each.

The more I researched my way into the world of dividend investing however, the more companies I uncovered which were not included in this elite index of stocks. Chevron (CVX) is an example of a company which has consistently raised distributions for 25 years in a row and is not part of the index. Colgate –Palmolive (CL) is a company which has rewarded shareholders with higher distributions for 49 consecutive years, yet it was only recently added to the index. In addition, most recently a company which had only raised distributions for much less than 25 years had been added to the index – Ecolab (ECL). The company has only boosted dividends for 21 years in a row. This did not make much sense, and as a result I have paid very little attention to this index which I previously viewed as elite. The list was too exclusive and was leaving out a lot of potentially great dividend growth stocks. You can view the S&P Dividend Aristocrats Index list here.

I did a little further research on the index, and found out the criteria for inclusion in it:

1. A company has to be a member of the S&P 500
2. A company must have increased dividends every year for at least 25 consecutive years
3. The company must meet minimum float-adjusted market capitalization and liquidity requirements defined in the index inclusion and index exclusion rules below.

After reviewing the criteria, I realized that this index might be great for someone who might decide to start a mutual fund or an ETF based on it, and earn recurring fees, rather than for the serious do it yourself dividend investor. As a dividend investor, I do not really focus exclusively on companies that are part of the S&P500 index. In fact, I want to have a list of all companies raised dividends for over 25 years, and then decide for myself which companies to focus on. I prefer to focus on quality, than remove companies because of irrelevant criteria.

Having minimum liquidity and float requirements is important if you are creating an index, as it would make it easy for big institutional investors to put money in them. For individual investors however, these requirements are irrelevant, as few have the tens of millions of dollars in net worth that would make investing in stocks with low trading volumes difficult.

While I was a big fan of the 25 year rule, I found out that in certain circumstances, companies which have raised distributions for at least 20 consecutive years could be added if few other firms fit the criteria for inclusion. These criteria are related to maintaining a minimum 40 companies in the index and preventing certain sectors from comprising over 30% of the index.

Other mysterious omissions from the S&P Dividend Aristocrat index are related to special dividends and stock spin-offs.

Back in the mid 2000’s, the company Nucor (NUE) was experiencing a really good profitability, and had record profits. The company raised regular distributions significantly, but also started paying a large special dividend every quarter. With the recession in 2008 and decline in prices for steel, the company scrapped its special dividends. At the same time it kept raising distributions to shareholders, albeit at a slower pace than before. The reason why S&P removed this stock from its list of Dividend Aristocrats in 2009 was probably because they were using computer data and saw a decrease in total dividends paid, without taking the time to really understand the driver behind the change. In 2012, Nucor managed to raise its quarterly dividend for the 40th consecutive year in a row.

Another mysterious deletion from the S&P Dividend Aristocrats index occurred in 2008, after Altria Group (MO) had spun off Kraft Foods in the previous year. While this resulted in a decrease in the amount of distributions paid to Altria shareholders after the spin-off, this was mostly due to the distribution of Kraft shares to investors. An investor who purchased Altria stock in early 2007, received shares in Kraft Foods. The total amount of dividends paid by their shares in Altria (MO) and the Kraft shares they received in 2008 more than exceeded the distributions paid in 2006 and 2007.

As a result, I have focused my attention exclusively on the Dividend Champions list by David Fish. It includes over 100 companies which have regularly boosted dividends for over 25 years in a row, which provides for a more thorough list of stocks for further research.

Full Disclosure : Long MO, NUE, CL ,CVX

Relevant Articles:

Why do I like Dividend Aristocrats?
Dividend Aristocrats List
Dividend Aristocrats List for 2009
The World’s Best Dividend Portfolio
Most Widely Held Dividend Growth Stocks
- Carnival of Wealth

4 comments:

  1. I totally agree. While the S&P Dividend Aristocrats list is a good starting point for a Dividend Investor, there are a lot of companies that get excluded if for no other reason than the list can only be drawn from the current 500 members of the S&P 500 index. This is only a fraction of the stocks available.

    David Fish's list is not only far more inclusive, but he includes many useful details about each of the 469 members of the most recent list. He also updates the information monthly vs. a single annual update for the S&P list.

    While I am still building my portfolio with stocks that have a 25+ year history of increases, I am keeping an eye on the Contenders (10 - 24 years) and Challengers (5 - 10 years) lists for attractive choices. I'm planning to limit my portfolio to stocks with a minimum 10 year dividend increase history, but having the list of challengers available makes it easy to spot and evaluate potential choices while they are approaching that minimum.

    ReplyDelete
  2. Why not use SDY ?

    84 stocks from S&P 1500 and 20 consecutive years of increasing dividends. Nucor, Chevron, Colgate are all part of this ETF..

    Great blog by the way !

    ReplyDelete
  3. Excellent article DGI. As a long term holder of MO (12 years at least) it's a prime candidate, and a great way to indirectly own some SBMRY which is also growing it's dividend. The MDLZ/KRFT spin also resulted in a minor dividend increase. KRFT talks openly about planning to regularly increase the dividend. It may be the jewel in the spin for DG investors who held on. Your article points out the necessity of learning what one can about a company and looking beneath the obvious. Keep up the good work!

    A

    ReplyDelete
  4. Thanks for all your work. A great post would be a selection of small cap divided champions.

    ReplyDelete

Questions or comments? You can reach out to me at my website address name at gmail dot com.

Popular Posts