What is an Aristocrat?
There are different kinds of aristocrats. The word aristocrat comes from the Greek. The Greek word comes from a pair of root words that mean “best,” and “rule.” Therefore, the aristocracy was supposedly the ruling class of the best people. An aristocrat was a member of that class. A “dividend aristocrat” is (supposedly) one of the best dividend stocks. Of course, that designation requires a definition of what is “best.” One Seeking Alpha author, FerdiS, has a good set of rules for his selection criteria for dividend aristocrats. A link to his article is provided at the end of this blog post.
Dividend Investment Rules
It is wise, if you are an investor in individual stocks or in ETFs and mutual funds to have some basic rules for investment decisions. I like the rules FerdiS uses to pick dividend-focused stock investments. Of the 65 dividend aristocrats he covered in his article, I hold fourteen: JNJ, ADP, WMT, ITW, MMM, MCD, T, ED, AFL, TGT, CAH, ABBV, O, and GPC.
Sixty-Five Dividend Aristocrats as presented by FerdiS
“The S&P 500 Dividend Aristocrats Index is a list of 65 companies in the S&P 500 that have increased their dividends for at least 25 consecutive years.” He selects stocks using the following characteristics:
He wants them to be a member of the S&P 500. In other words, he is limiting his selection to large cap stocks that are unlikely to go broke. Secondly, he is looking for a dividend increase streak of at least 25 years. That eliminates a large group of stocks. Furthermore, the company must have a market capitalization of at least $3 billion. Finally, they must average at least $5 million in daily trade value for the trailing three months. The stock must be liquid so that you can sell it easily and so that the buying process has a lot of competition from buyers and sellers.
Ranking System Basics
His definition table (I labeled my edited version “Ranking System – Safety, Strength & Moat” has some abbreviations you might not know. His abbreviation “VL” means Value Line. Value Line is a ranking system among many. If you use their website without a subscription, you cannot see the ratings. I don’t have a subscription.
His abbreviation for “M* Econ. Moat” is a reference to The Morningstar Economic Moat Rating. This rating represents a company’s sustainable competitive advantage. If it is hard for others to compete, a company is said to have a wide moat around their business castle. For example, Pepsi has a wide moat. Yes, there are competitors, but it is unlikely that any company will bring Pepsi to destruction. The bottom line is that there are different levels of safety, strength, and moat even within the dividend aristocrat universe. Some are exceptional and others are not.
Winquist Dividend Aristocrats Are More Diverse
As stated earlier, our accounts hold fourteen of the 65 mentioned in his article: JNJ, ADP, WMT, ITW, MMM, MCD, T, ED, AFL, TGT, CAH, ABBV, O, and GPC. ABBV, JNJ and CAH are health care. MCD, WMT and TGT are consumer stocks. The others include industrials, financials, a utility, and a REIT. Some of them have been beaten down do to the Covid-19 panics. That is not of concern. Rather, I watch to see if the trend of increasing dividends can and will continue. These aren’t the only stocks I own that are paying increasing dividends.
Unlike FerdiS, I also hold mid-cap and small-cap stocks with increasing dividends. These face more competition, so their moats are very small but they also have the potential for faster stock price appreciation. Therefore, my aristocrat requirement is less rigid and restrictive. If a company has raised it’s dividend for ten years (or less) I consider the investment based on other merits. And some investments aren’t expected to have dividend growth. They might be more of an income play with a higher yield like GAIN.
Summary
The key take-away is that every investor should set rules for their investment decisions. If you don’t, you will likely have an interesting mess on your hands. If you are tending sheep, you should know about the sheep you have and why they are in your sheepfold or pasture. Otherwise, you might introduce sickly livestock or even wolves into the midst.
Know Your Flocks & Herds 