Perhaps because I have time on my side, I get excited when the market sells off like it did a few weeks ago.
I know that I’ll be able to buy quality stocks at a lower price. That’s especially interesting to income investors who might be able to pick up an extra half a percentage point or so of yield with no real changes to a company’s ability to generate cash.
When stocks decline, one of the first places I look is the list of S&P Dividend Aristocrats. Dividend Aristocrats are stocks that are members of the S&P 500 that have increased their dividends every year for the past 25 years. And their track records are welcome signs in a tough economy…
Dividend Aristocrats for Income Seekers
[ad#Google Adsense 336×280-IA]Currently, there are 42 Aristocrats. They include names like Target (NYSE: TGT), Walgreen’s (NYSE: WAG) and Becton Dickinson (NYSE: BDX).
Investing in Dividend Aristocrats has become a very popular method for income seekers as the stocks’ dividends are extremely reliable.
However, there are other, often overlooked, places to look for dividend growth as well.
Dividend Champions, for example, have just as long a history of annual dividend increases. The difference is that unlike Aristocrats, Champions do not have to be members of the S&P 500.
There are currently 100 Dividend Champions including Lowe’s (NYSE: LOW), also an Aristocrat, Healthcare Real Estate Investment Trust HCP, Inc. (NYSE: HCP) and small-cap food-maker Lancaster Colony (Nasdaq: LANC), which has increased its dividend every year since 1963.
Additionally, there are the Dividend Achievers – stocks that hope to one day become Aristocrats and Champions. These are companies with at least a10-year history of raising dividends.
Before they could boost their dividends for 25 or more straight years, the Aristocrats and Champions had to do it for 10 years first.
Insurer Harleysville Group (Nasdaq: HGIC), oil and gas pipeline Kinder Morgan (NYSE: KMP) and mutual-fund company T.Rowe Price (Nasdaq: TROW) are all Achievers. T. Rowe Price is just one year away from becoming a champion.
Investing Long-Term With Dividend Aristocrats
If investing for the long term, I’d rather have these types of dividend-paying stocks in my portfolio, even if the yields are a little lower, than other stocks whose dividends are not being raised but have a higher current yield.
The dividend that is continuously rising is more likely to keep up with or exceed inflation than the stock whose dividend remains constant.
Additionally, an Aristocrat, Champion or Achiever has a track record of raising the dividend. Management understands that the raised dividend is important to shareholders. The executives should do everything in their power to continue that tradition, because they know investors expect it. If they are unable to hike the dividend after many years of doing so, that signals there is a problem with the company and will likely lead to an exodus from income investors.
Investors seeking current income aren’t the only ones who crave a rising dividend. Reinvesting dividends (particularly ones that grow) are an easy way to build wealth.
Let’s look at Harleysville as an example. The company has been lifting its dividend every year for the past 24 years. Over the past 10, the average dividend increase was 9.4 percent.
If we buy 100 shares, reinvest the dividend and the company continues to raise its dividend by 9.4 percent per year – even if the stock doesn’t budge in 10 years, the initial $2,879 will be worth $6,464 – a 125 percent return. And we’d have 225 shares that can spin off income if we decide to take the dividend in cash at that point.
But if the dividend does not increase, we end up with just $4,864, a 69 percent total return and 169 shares of stock.
A management team and board of directors that understand that their shareholders are the owners of the company, and are committed to increasing the payout to investors each year, can be the best partner an investor can find in his or her pursuit of wealth.
To amass wealth over the long term, don’t chase yield. Chase track record. A track record of annual dividend increases has a better chance of getting you where you want to be.
Good investing,
— Marc Lichtenfeld
[You can get a list of the Aristocrats from Standard & Poor’s right here. You may have to register (for free) in order to download the information.]
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Source: Investment U