Dividend Aristocrats For Further Research

One of the ways I come up with investment ideas is by combing through the Dividend Growth Investing universe. One of my favorite lists to go through and familiarize myself with is the list of Dividend Aristocrats. While it is not as exhaustive as the Dividend Champions list, it is a very good starting point if you are just starting out.

Dividend Aristocrats are S&P 500 companies that have managed to raise dividends for at least 25 years in a row. These are quality businesses, worth studying. Increasing dividends for 25 years in a row does not happen by accident. This is usually the end result of a quality company with strong competitive advantages in an industry, that has riden long-term trends. All of these factors allowed for growth in earnings per share over time, as well as dividends per share as well.

Of course, past performance is not an indication of future results. One needs to go through the list, and focus on the companies that are still growing earnings. There are some companies that are raising dividends by a small percentage each year, however these are not growing earnings. This is where reviewing the list makes sense, rather than just automatically going with everything in there.

As part of my screening process, I reviewed the earnings trends for each of the dividend aristocrats over the past decade. This is not a hard and fast method, as I use my “experience” or “gut feel” (or some may say “biases”) to determine which earnings stream look the most consistent to me. The beauty lies in the eyes of the beholder - your research/review may yield slightly different results. Also, changing the start/end timeframe could influence results. For some companies that are at a cyclical low in EPS, the growth may appear to be larger than necessary hence you need to think about whether things you are seeing are too good to be true, or yes.

I then looked at the 5 year annualized growth rates in dividends, alongside with the most recent dividend increase. My cut-off was around 5%. Note that dividend growth rates could fluctuate. That being said it is more likely that a consistent dividend grower continues being consistent, than for an inconsistent grower to become consistent all of a sudden. It’s all nuanced of course - screening is just the first step of the process. One needs to look at the individual issues, and get a feel for their attractiveness on the fundamental, quality and valuation level.

I ended up with a short list of about 27 dividend aristocrats, for which I populated the following columns:

- 5 Year Annualized Dividend Growth
- Forward P/E ratio
- Dividend Yield
- Forward Dividend Payout Ratio
- Ownership

I then also made a quick “estimated return” calculation by adding up the current dividend yield to the 5 year annualized rate of dividend growth. The other “estimated return” was calculated by adding the most recent dividend increase to the current dividend growth. That presents a good range of possible returns going forward, with the latter being more conservative usually.

Notably this list is a good starting point to determine which companies I want to add to, and build a position in. This is the type of work that’s helpful to get me to a population of companies for further research. Note that not all of those are going to be invested in, as I have two competing items for my capital:

- Relative attractiveness (fundamentally, qualitatively, valuaiton-wise)
- Position limits

I am using this list as a starting guide. It’s basically a minefield for opportunity costs, trade-offs and decisions.

This is the table I am referring to: