Filed under: Investing Basics, Stocks, Dividend Stocks, Stock Markets, Investing
Dividend stocks have become a key source of income for many investors. Low interest rates on more conservative investments like bonds and bank CDs have forced those who need investment income from their portfolio to shift toward stocks, and stocks with histories of consistent dividend growth look especially attractive.
Yet those who aren’t familiar with stock investing can draw false conclusions from popular ways of tracking dividend stocks. In particular, the distinction of being a so-called “Dividend Aristocrat” is unquestionably one of the highest achievements most dividend stocks ever reach. But you have to look closely at the numbers to ensure that a company isn’t simply hanging on to its Dividend Aristocrat status on a technicality.
What It Takes to Be a Dividend Aristocrat
Dividend Aristocrats have increased the amount of dividends they pay to shareholders every year for at least 25 consecutive years. Over a quarter-century, a company has to demonstrate that it can thrive under strong economic conditions and more sluggish periods. Those that grow their dividend even in tough times show a degree of resiliency that most stocks can’t match.
Setting a quarter-century requirement for annual dividend increases limits the number of Dividend Aristocrats to just a few dozen. But when you look more closely at the stocks that make the list, you can see that while some companies legitimately seek to boost their payouts by substantial amounts year in and year out, others seem merely to make increases for the sake of retaining their Aristocrat status — and don’t reward shareholders nearly as much for their loyalty.
Giving Shareholders the Tiniest of Raises
One sign of a less-than-total commitment to dividend investors is when a stock makes only token increases to its dividend. For instance, steelmaker Nucor (NUE) has a more than 40-year track record of raising its payout to shareholders annually. But all four of the company’s annual dividend increases since 2010 have been just a quarter-cent per share every three months, amounting to less than a 3 percent rise in dividend payments in four years. Technically, Nucor paid a higher amount each year, but it’s hard to give the company much credit for the tiny gains. Walmart (WMT) is another example, having limited its dividend increase earlier this year to a single penny, or slightly more than 2 percent, after a nearly 20 percent hike in 2013. These stocks meet the letter of the law, but they don’t necessarily display the level of optimism that investors would prefer to see.
Another thing to watch out for is a Dividend Aristocrat with an unimpressive dividend yield. Just because a company grows its payout over the years doesn’t mean that it pays a huge amount to shareholders. Paint maker Sherwin-Williams (SHW) is one example, with its 36-year record of annual payout increases only managing to equate to a 1 percent yield at current prices. Mutual fund and investing specialist Franklin Resources (BEN) has an even uglier yield of 0.85 percent, and that’s even after taking into account a 20-percent dividend increase late last year. For those seeking income from their portfolio, these picks won’t do a lot to provide regular dividend payments that can help cover living expenses.
Accusing these stocks of gaming the system is a bit harsh. But given that there’s little difference between paying the same dividend and making a minor boost, dividends that rise by just a tiny amount or pay an insignificant yield to make future increases easier to swallow certainly make it look like their companies are interested only in preserving their spot on the Dividend Aristocrats list.
Follow the Money
These examples shouldn’t lead you to ignore Dividend Aristocrats entirely. Most of the members of the list combine substantial dividend growth with above-average yields, and they still represent a great starting point for investors looking for safety and consistency of income.
What you do need to realize, though, is that just because a stock is a Dividend Aristocrat doesn’t automatically mean that it has the favorable attributes that you’re looking for. When you see a Dividend Aristocrat that doesn’t meet your needs for dividend yield or future growth potential, don’t hesitate to reject it and find a stock that does fit the bill.
You can follow Motley Fool contributor Dan Caplinger on Twitter @DanCaplinger or on Google+. He has no position in any stocks mentioned. The Motley Fool recommends Nucor and Sherwin-Williams. To read about our favorite high-yielding dividend stocks for any investor, check out our free report.
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Source: Investing
