Typical definition of a dividend aristocrat is a company which has
increased dividends for 25 consecutive years in the nominal terms. We have
inflation every year and if a company continues to perform in the same way, it
should be able to raise dividends in line with the inflation, making it a dividend aristocrat. This is not the case and there are only 62 out of S&P500.
Is it worth investing in dividends aristocrats’ stocks?
Lets have a look for investing $10,000 in dividend aristocrats vs. S&P500 in 2010 until now. I selected a random sample of 15 out of 62 companies. Companies highlighted with red under performing S&P500 fund (all dividends are re-invested in both cases):Notes:
- Most companies pay dividends 4 times a year. Dividends are reinvested 4 times. For my calculation I did reinvestment once a year for the cumulative dividend.
- Compound inflation in the USA between 2010 and 2020 is 25%.
I used to focus on cash engines in the past. Just looking at the dividends is not a guarantee of high return. For example, if I invested in ExxonMobil, my nest egg would be lagging S&P500 quite a lot, while missing diversification. “3M Company” is highlighted with red, because it’s just marginally higher S&P500 and such performance does not justify the investment in the single stock.
Perhaps, a portfolio can be created of dividend aristocrats and the ones that have beaten S&P500 over 10-20 years period. This assumes that you can have an account with low fees, as additional 2-3% drag will kill all the advantages.
Over the past 63 years, the S&P 500’s composition has changed dramatically. In 2007, the index’s 50th anniversary, S&P published a list of the 86 companies that remained from the original line-up. That number has steadily declined, and today, only about 60 original members remain.
As original members have dwindled, so has the average tenure of companies in the index. In 1964, the average index tenure of an S&P 500 company was 33 years. As of 2020, tenure shrank to 20 years.
I will certainly think about it. Your views and opinions are very welcome.