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Why Have Dividend Aristocrats Outperformed?

The Dividend Aristocrat Index is made up of 54 businesses with 25 or more years of consecutive dividend increases.  So why do dividends matter?  Dividend paying stocks have outperformed non dividend paying stocks by 6.94 percentage points per year from January 31st, 1972 through 2013.

Source:  Reasons to Consider Dividend Paying Stocks, page 6

Dividend Aristocrats have done even better than regular dividend paying stocks.  In fact, the Dividend Aristocrat Index has outperformed the S&P 500 by 2.88 percentage points per year over the last decade.

Source:  S&P 500 Dividend Aristocrats Fact Sheet, page 2

It is my belief that dividend paying stocks outperform non dividend paying stocks for two reasons.  The first is that a company that pays dividends is likely to be generating earnings or cash flows so that it can pay dividends to shareholders.  Secondly, a business that pays consistent dividends must be more selective with the growth projects it takes on because a portion of its cash flows are being paid out as dividends.  This more careful scrutiny over capital allocation decisions most likely adds to shareholder value.

I suggest that Dividend Aristocrats have historically outperformed the market and other dividend paying stocks because they are, on average, high quality businesses.  A high quality business should outperform a mediocre business over a long period of time, all other things being equal.  For a business to increase its dividends for 25+ consecutive years, it must have or at least had in the very recent past a strong competitive advantage that allowed the business to grow profitably for 2.5 decades.

Industry Leading Companies

Of the 54 Dividend Aristocrats, 17 (over 30%) are the largest by market cap in their respective industries.  38 of the 54 (over 70%) Dividend Aristocrats are one of the top 3 largest companies in their industries.  The companies in the Dividend Aristocrat Index are generally larger than their peers.  Intuitively, this makes sense.  If a company has grown for 25 or more years, it is most likely going to be well established in its industry.  The 17 Dividend Aristocrats that are the largest in their industry are listed below, along with their industry.


Name Ticker Industry
Coca-Cola Co KO Beverages – Soft Drinks
AFLAC Inc AFL Accident & Health Insurance
Wal-Mart Stores WMT Discount, Variety Stores
Grainger W.W. Inc GWW Industrial Equipment Wholesale
Archer-Daniels-Midland Co ADM Farm Products
Exxon Mobil Corp XOM Major Integrated Oil & Gas
Procter & Gamble PG Personal Products
VF Corp VFC  Textile – Apparel Clothing
Emerson Electric Co EMR Industrial Electrical Equipment
Johnson & Johnson JNJ Drug Manufacturers – Major
McDonald’s Corp MCD Restaurants
Clorox Co CLX Housewares & Accessories
Sysco Corp SYY Food Wholesale
Ecolab Inc ECL Cleaning Products
Abbott Laboratories ABT Medical Appliances & Equipment
Stanley Black & Decker SWK Machine Tools & Accessories

Highly Profitable Businesses

The businesses in the Dividend Aristocrats Index have another distinguishing feature; they are highly profitable.  The average return on assets for the stocks in the S&P 500 is 7.23%.  The average return on assets for the Dividend Aristocrats Index is 9.58%, 2.35 percentage points higher.

Further, 25% of the stocks in the S&P 500 have a return on assets over 10%, while 37% of stocks in the Dividend Aristocrats Index have a return on assets over 10%.  The Dividend Aristocrats with a return on assets greater than 10% are listed below.


Name Ticker Industry ROA
McGraw Hill Financial Inc MHFI Business Services 27.00%
T Rowe Price Group Inc TROW Asset Management 21.50%
Grainger W.W. Inc GWW Industrial Equipment Wholesale 19.20%
Bard C.R. Inc BCR Medical Instruments & Supplies 18.00%
Brown-Forman Corp B BF-B Beverages – Winieries & Distillers 16.80%
Colgate-Palmolive Co CL Personal Products 15.70%
McDonald’s Corp MCD Restaurants 15.40%
AbbVie Inc. ABBV Drug Manufacturers – Major 14.50%
Johnson & Johnson JNJ Drug Manufacturers – Major 14.50%
Franklin Resources Inc BEN Asset Management 14.10%
3M Co MMM Diversified Machinery 14.10%
Clorox Co CLX Housewares & Accessories 13.10%
Sigma-Aldrich Corp SIAL Specialty Chemicals 13.10%
PPG Industries Inc PPG Specialty Chemicals 12.70%
VF Corp VFC  Textile – Apparel Clothing 12.30%
Exxon Mobil Corp XOM Major Integrated Oil & Gas 12.00%
Sherwin-Williams Co SHW Specialty Chemicals 11.50%
Hormel Foods Corp HRL Meat Products 11.40%
Kimberly-Clark KMB Personal Products 11.20%
Illinois Tool Works Inc ITW Diversified Machinery 10.90%

High Profitability & Industry Leading Businesses

There are a total of 12 Dividend Aristocrats that are top 3 in their industry in both size and return on assets.  These businesses are large and command a dominant market share, while maintaining higher margins than their peers.  Many of these 12 businesses are highly recognizable household names.  The 12 Dividend Aristocrats that are top 3 in their industries for both profitability and size are listed below:

Of the businesses listed above, Wal-Mart & Coca-Cola are Top 10 stocks based on The 8 Rules of Dividend Investing.  The 8 Rules of Dividend Investing ranks dividend stocks based on quality, safety, and value using several quantitative metrics that are both academically verified and based on the common-sense principles of great investor such as Warren Buffett, Peter Lynch, and Benjamin Graham.  An

Consecutive Years of Dividend Payments

Wal-Mart has paid increasing dividends for 41 consecutive years. The company’s long history of dividend increases shows that it can protect its competitive advantage and grow profitably throughout a range of economic and societal changes.

Coca-Cola has increased its dividend payments for 52 consecutive years.  The company’s stability and consistent growth is derived from the slow changing soda and beverage industry.

Why it matters: The Dividend Aristocrats (stocks with 25-plus years of rising dividends) have outperformed the S&P 500 over the last 10 years by 2.88 percentage points per year.
Source: S&P 500 Dividend Aristocrats Factsheet, February 28 2014, page 2

Dividend Yield

Dividend Yield

Why it Matters: Stocks with higher dividend yields have historically outperformed stocks with lower dividend yields. The highest-yielding quintile of stocks outperformed the lowest-yielding quintile by 1.76 percentage points per year from 1928 to 2013.
Source: Dividends: A Review of Historical Returns

Payout Ratio

Payout Ratio

Why it Matters: High-yield, low-payout ratio stocks outperformed high-yield, high-payout ratio stocks by 8.2 percentage points per year from 1990 to 2006.
Source: High Yield, Low Payout by Barefoot, Patel, & Yao, page 3

Long-Term Growth Rate

The long-term growth rate of each business is calculated as the lesser of the 10-year per share growth in either dividends or revenue.

Growth Rate

Why it Matters: Growing dividend stocks have outperformed stocks with unchanging dividends by 2.4 percentage points per year from 1972 to 2013.
Source: Rising Dividends Fund, Oppenheimer, page 4

Long-Term Volatility

Long-term volatility for each business is calculated as the 10-year price standard deviation.


Why it Matters: The S&P Low Volatility index outperformed the S&P 500 by 2 percentage points per year for the 20-year period ending September 30th, 2011.
Source: Low & Slow Could Win the Race, page 3


You can download the complete list of July Dividend Aristocrats here.  The list includes each company’s market cap, return on assets, and relative position within its industry.  The list contains much of the data used in the first portion of this article.

Wal-Mart and Coca-Cola are both excellent investments based on the 5 Buy Rules from the 8 Rules of Dividend Investing due to both company’s strong dividend yields, growth rates, and low volatility.  Wal-Mart outranks Coca-Cola due to its significantly lower P/E ratio of about 16 versus about 22.5 for Coca-Cola.

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