Dividend Aristocrats are S&P 500 stocks whose payouts have risen for at least 25 years in a row

• Dividend Aristocrats are S&P 500 stocks that have consistently paid an increasing dividend for at least 25 years.
• They're often used as part of a defensive equity strategy that seeks to provide lower-risk returns.
• Investors frequently add Dividend Aristocrats to their portfolios by buying funds that hold them.
• Read more stories from Personal Finance Insider.

If you're an income investor, your portfolio probably includes dividend-paying stocks representing companies that show stable earnings, solid fundamentals, and a strong history of growth and profit. No stock demonstrates those characteristics more consistently than an S&P 500 Dividend Aristocrat.

"Companies that have been able to consistently grow their dividend have a tendency to be high quality compared to those of the broader market in terms of earnings quality and leverage," says Tim Bain, president and chief investment officer at Spark Asset Management. "A company's ability to reliably increase its dividend for years, or even decades, can be an indication of its financial strength or discipline."

Dividend Aristocrats must meet and maintain rigid standards including membership in the S&P 500 and a history of consistently increasing dividend payments for at least 25 years in a row. That combination matters because, since 1926, dividends have made up 32% of the S&P 500's total return. S&P Dow Jones Indices studies show that dividend-paying stocks outperform non-payers on a risk-adjusted basis.

What are the requirements to be a Dividend Aristocrat?

The S&P 500 Dividend Aristocrats Index, introduced in 2005, measures the performance of S&P 500 companies that have increased their dividend payouts for 25 consecutive years and meet other requirements. The index consists of large-cap stocks across a range of sectors. It's considered an attractive investment for income investors because of the inclusion of many large blue chip stocks.

The assortment of stocks in the Aristocrats index offer higher risk-adjusted returns and better downside protection than those in the broad-based S&P 500 benchmark. Although income investments tend to be value-oriented, the Aristocrats demonstrate both growth and value characteristics. Since 1999, the index on average has had 57.55% exposure to value and 42.44% exposure to growth.

To be an S&P 500 Aristocrat, a stock must:

• Be a member of the S&P 500 Index
• Maintain a total market capitalization of $3 billion (float-adjusted)
• Have a history of increasing its dividend payments for 25 consecutive years
• Maintain $5 million in average daily value traded (ADVT) for three months before acceptance into the index

S&P Dow Jones Indices reconstitutes the list of qualifying Dividend Aristocrat companies at the beginning of each year and publishes the list on Feb 1. The index is rebalanced quarterly with a 30% sector cap to ensure diversification. All constituents are equally weighted to eliminate concentration risk for a single stock.

Dividend Aristocrats list

As of April 2022, the index contained 66 constituents spread across 10 sectors, ranging from 21.5% in consumer staples to 3% in information technology, according to data compiled by suredividend.com.

Other sectors include Industrials (19.2%), Financials (12.6%), Materials (12.2%), Healthcare (11.4%), Consumer Discretionary (7.2%), Utilities (4.9%), Real Estate (4.5%), and Energy (3.5%). 

Here's the entire list, from most to least years of continuous dividend growth:

2022 S&P 500 Dividend Aristocrats

Dividend Aristocrat advantages and disadvantages

Dividend aristocrats provide some obvious advantages for investors. They represent stable, blue-chip companies that have a long history of dividend growth and strong financials.

"Some refer to these as 'ruler stocks' because if you laid down a ruler on a graph of dividends over time, the ruler would point to the northeast and most of the points would be very close to the ruler," says Robert R. Johnson, professor of finance, Heider College of Business at Creighton University.

Addressing the idea that "creative accounting" will always be something with which investors must contend, John Buckingham, principal and portfolio manager at Kovitz Investment Group, notes: "You can't fake a dividend, especially one that is increased every year."

One disadvantage is the slight underperformance versus the broader S&P 500 Index over the last decade, with a 14.1% total annual return for the Aristocrats versus 14.6% for the S&P 500. But this has come at a lower risk. 

Relatively lower dividend yields can also be a disadvantage. "Some investors may find a dividend investing con in the fact that it takes some time to acquire substantial dividend payments," says Mike Butler, market and trading expert at the online financial network, tastytrade.

The fact that dividends are typically treated as taxable income and the lack of control over the timing of their distribution can also be among the disadvantages investors in Dividend Aristocrats might face.

 "A drawback to a dividend-paying investment is that the investor cannot control the taxable distribution timing, and there are many situations where one might prefer the company to reinvest in its business than pay out cash to shareholders," Buckingham says.

Dividend Aristocrat pros and cons 

How to invest in Dividend Aristocrats

To add Dividend Aristocrats to a portfolio, many prefer to buy funds that hold them.

"While an investor could choose to invest in a single company, we believe in the benefit of diversification and would encourage investors to look for ETFs, UITs or mutual funds to get broad exposure to a number of these companies," says Bain. 

Sam McFall, managing director at Mill Creek Capital Advisors, agrees. "A Dividend Aristocrat strategy should be considered a defensive equity strategy," he says.

For those interested in going the individual stock route, Johnson points to companies like 3M, Coca-Cola, Procter & Gamble, and others with a record of increased dividends for 50 years or more.

"Simply investing in a stock because it has a high dividend yield is problematic as some stocks with very large dividend yields are likely to have unsustainable dividend levels," he says.

Taking a "whole of investing approach," Buckingham says his firm would only want to invest in Dividend Aristocrats if they offer "significant upside potential" beyond just the dividend yield because capital appreciation accounts for the bulk of the total return from equities.

"In short, whether a dividend payer is or is not an Aristocrat is not sufficient reason to warrant a purchase," he says.