Monday, February 4, 2008

Why do I like the Dividend Aristocrats?

Some of my favorite stock lists is the S&P’s Dividend Aristocrats and the S&P High-Yield dividend aristocrats. These lists contain companies which have consistently increased their dividends over the past 25 years, which is a big achievement. These companies have gone through several up and down economic cycles and shown superiority of rewarding their shareholders with increasing payments through dividend growth.

The dividend aristocrats have averaged annual total returns of 12.93% per year since 1989, beating the S&P 500 total return of 11.66% by 1.3 annually. The dividend aristocrats outperformed S&P 500 in 9 out of the 18 years in this study. Investors in the dividend aristocrats suffered almost no losses during the 2000-2002 bear market; whereas the S&P 500 lost half of its value over the same period. While an 18 year period might not be representative of future performance, and future results might be very different, I still like the stocks in the list for their passive income generation potential which is a function of their ability to generate positive dividend growth. I believe that good dividend paying stocks are the only way out there to truly generate passive income streams without any significant amount of work in the future to sustain it. The only catch that involves a lot of work is selecting the stocks that would generate the future income. I think that this list gives you good solid value plays, which have sound fundamentals. Only a company with strong financials can afford to have positive dividend growth over time.

Academic research indicates that a simple buy and hold of an S&P 500 mutual fund outperforms almost any other strategy in the long run. I think though, that on average most baskets of US stocks, which show good diversification and hold at least 30 companies would produce annual returns which are very close to the S&P 500. With only 390 companies paying any dividends to their shareholders, still down from 402 in 1999, and sluggish long-term dividend growth in recent years, it seems to me that investors in the broad benchmark are still relying mainly on capital gains for their long-term performance. They seem to be forgetting that the market, although very rare, could fall for two or more years in a row, or trade in a range for 13 years, just like it did from 1966-1979. Any returns that were generated during that period were primarily due to reinvested stock dividends. Fundamentally speaking dividend paying stocks paying decent dividend yields could produce decent returns in bear markets, flat markets and even bull markets.

Relevant Articles:

- Best Dividends Stocks for the Long Run
- Best High Yield Dividend Stocks for 2009
- Dividend Aristocrats List for 2009
- Yield on Cost Matters
- The Dividend Edge

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