For many investors, a lengthy record of dividend payments is a trusted indicator of a company’s financial health and corporate governance. The S&P 500 Dividend Aristocrats Index is a list that keeps track of those companies that have increased dividends every year for the last 25 consecutive years.
Learn how the S&P 500 Dividend Aristocrats Index works and how it can impact individual investors.
Definition and Examples of S&P 500 Dividend Aristocrats
It’s a positive sign when a company increases its dividend payment from one year to the next. It means that a company is capable of maintaining growth and profitability in the future. If a company increases its dividend each year over a long period—say 25 years—all the better. The S&P 500 Dividend Aristocrats Index provides investors a comprehensive list of companies that have done just that.
S&P Dow Jones Indices, which owns the S&P 500 index, reviews and updates the list of qualifying companies every January. The index is rebalanced quarterly too, in January, April, July and October, meaning the amount of shares of each constituent is reset so that each holding makes up an equal percentage of the index.
A company is removed from the index if it fails to increase its dividend from one year to the next.
As of July 27, 2021, there are currently 65 constituents on the S&P 500 Dividend Aristocrats Index. Among the top 10 by index weight include Target Corp (TGT), Exxon Mobil Corp (XOM), and T Rowe Price Group Inc (TROW).
How Dividend Aristocrats Work
To be listed on the S&P 500 Dividend Aristocrats Index, a company must meet four criteria:
- Be a member of the S&P 500 Index
- Maintain a float-adjusted total market capitalization of $3 billion
- Increase dividend payments for 25 years consecutively
- Maintain $5 million in daily share trade value for three months
Given the above criteria, the index primarily consists of blue chip, large-cap companies, and the index typically has low turnover. The companies on the index span a wide variety of industries, hitting sectors like health care, energy, and financials. The index is often considered a smart investment choice because it includes many stable stocks with strong growth trajectories.
Pros and Cons of Dividend Aristocrat Companies
Lower volatility compared to broader market
Reliable income from dividends
Delivers high yields
Equal weighting doesn’t allow winners to keep winning
- Lower volatility compared to broader market: Because the index is made up of large-cap, blue-chip companies, it has lower volatility than the broader market. The S&P 500 Dividend Aristocrats Index has outperformed the S&P 500 about 71% of the time in down months (when the market is not performing well) and 44% of the time in up months.
- Reliable income from dividends: According to the S&P Dow Jones Indices, since 1926, dividends have contributed nearly a third of total equity return while capital gains have contributed two-thirds. Income investors appreciate the reliability of dividends.
- Delivers high yields: In recent years, the index has consistently delivered higher yields than the S&P 500. In 2019, the average yield of the index was 2.5%, while that of the S&P 500 was 1.8%.
- Equal weighting does not allow winners to keep winning: Because the index is reset each quarter to create equal weighting among all companies, companies with the highest share value cannot remain at the top. If a stock goes on a run, it will become outweighed and shares will be sold at the end of the quarter to rebalance the portfolio. Therefore, investors who like to incest in strong performers that continue to outperform are precluded from doing so.
What It Means for Individual Investors
The Dividend Aristocrats Index is a solid option for investors seeking low volatility and steady income through high-yield stock. Due to their sustainable dividend growth, an investment in companies within this index can provide investors with augmented total returns and a growing income stream. Historically, dividend-growth-oriented companies have helped to lessen risk during periods of heightened volatility and down markets.
A number of mutual funds and exchange-traded funds (ETFs) that track the index are available to investors, including versions of the index that incorporate environmental, social and governance (ESG) criteria.
- The S&P 500 Dividend Aristocrats Index lists companies that have increased dividend payments every year for the last 25 consecutive years.
- As of July 2021, there are 65 companies in the index.
- Index companies are reviewed annually and companies can be added or dropped from the list.
- The Dividend Aristocrats Index is an attractive option for investors seeking low volatility and steady income through high-yield stock.