Invest Like an Aristocrat

Avoid Pigging Out on Stocks with Fat Dividends

You’ve probably heard the saying that bulls make money but pigs get slaughtered. A pig gorges on high-flying stocks and holds onto them too long. A pig doesn’t bother with being diversified or managing risk properly. A pig goes all-in, sometimes on margin, and eventually gets slaughtered.

A dividend pig goes straight for the stocks that sport the highest dividend yields. The problem with that approach is that many of the highest-yielding stocks are the equivalent of junk bonds. Their yields are huge because investors perceive a heightened level of risk and require correspondingly bigger yields to compensate.

A large dividend is not necessarily a safe dividend. When a company with a large dividend commitment runs into financial trouble, that dividend can be slashed.

Long-term dividend investors should focus on companies that have a long history of boosting their dividends year after year. Stocks that have at least a 25-year uninterrupted history of annual dividend increases are known as dividend aristocrats. Owning dividend aristocrats that deliver steadily rising dividend streams is how you can reliably beat bonds, beat inflation, and grow your wealth over time.

There are currently 54 stocks in the S&P 500 that qualify as dividend aristocrats. Narrowing your window of eligible stocks to just them is a sound strategy for conservative equity income investors. These are all companies that have at least a quarter century track record of boosting their dividends, even during bear markets.

Top 20 Highest-Yielding Dividend Aristocrats

If you want to obtain high yields without investing in junk stocks, then consider picking among the highest-yielding dividend aristocrats. Some of these companies have been upping their payouts for more than 50 years straight.

If stock picking isn’t your thing and you just want to own a basket of all the dividend aristocrats, there is an exchange-traded fund for that! ProShares S&P 500 Dividend Aristocrats (NOBL) “invests exclusively in S&P 500 companies with the longest track records of year-over-year dividend growth.” According to the ETF’s profile, the Dividend Aristocrats index has outperformed the S&P 500 with lower volatility since its inception in 2005. The ETF has attracted $853 million in assets and carries an expense ratio of 0.35%.

Those looking for diversification into international dividend aristocrats will need to look elsewhere. NOBL holds only U.S. stocks. An investment in ProShares Dividend Aristocrats can be supplemented with a low-cost diversified foreign-only equity ETF such as Vanguard FTSE All-World ex-US (VEU).