For a business to be a Dividend Aristocrat, it must be in the S&P500, have at least 25 consecutive years of dividend increases, and meet certain size and volume requirements.
There are only 54 business that qualify to be dividend Dividend Aristocrats right now. Why is it important to invest in Dividend Aristocrats? Because the Dividend Aristocrats index has historically done very well, outperforming the S&P500 by 2.88% per year with less risk.
Arbitrary Rules Don’t Make Things Better
Several of the requirements to be a Dividend Aristocrat are arbitrary at best. Why does it matter if a business is a member of the S&P500? When investing in stocks, size doesn’t matter (small-caps have actually historically outperformed large caps), so why screen away small cap businesses with 25+ years of consecutive dividend increases? Removing artificial constraints from the Dividend Aristocrats index gives a clear view of what the index is attempting to find: great businesses with a long history of rewarding shareholders through increasing dividends.
If a business has increased its dividend 37 out of 38 years (with 1 year of paying a dividend without increasing), is it really inferior to a stock that has paid increasing dividends 25 years in a row? I don’t think so. If a business is spun-off from another company that has paid dividends for 25+ years, and continues to pay increasing dividends, is it somehow worse than a business that wasn’t spun-off? Once again, I don’t think so. Three businesses that have the same appeal as the constituents of the Dividend Aristocrats are: General Mills (GIS), Hershey (HSY), and Philip Morris (PM).
General Mills has paid dividends without reduction or interruption for… 115 years. The strength and stability of General Mills is hard to fathom. The company has paid uninterrupted dividends since 1899. It paid dividends through 2 world wars, the cold war, inflationary periods, deflationary periods, the great depression, and the most recent recession. There is every indication General Mills will continue to reward shareholders through growing dividends for the foreseeable (and unforeseeable) future. General Mills ranks very highly based on the 8 Rules of Dividend Investing. The company’s stability comes from selling low-priced brand name food products that consumers purchase in both good and bad economies.
The Hershey Company was incorporated in 1927 and founded in 1894 by Milton Hershey. The company has paid increasing dividends in 37 of the last 38 years. The lone year the company did not increase its dividend was in 2009, out of prudence due to uncertainty from the recession. The company’s cash flows were not in question during the recession.
Hershey’s Cash Flows 2003 to 2013
Philip Morris sells Marlboro and other cigarette brands internationally (no US sales). The company was spun-off from Altria (MO) in 2008. The company has increased its dividend every year since being spun-off. It should be a Dividend Aristocrat because its parent company had 39 consecutive years of dividend increases at the time of the spin-off. Cigarette’s are highly profitable, addictive, and very cheap to produce. They are a very slow-changing product which has given Philip Morris (and Altria) their long histories of success. Philip Morris ranks very highly based on the 8 Rules of Dividend Investing. It makes an excellent long-term holding for investors with long time horizons.