Today we have a guest post from Bob at Sure Dividend, where you’ll find articles that typically discuss value and dividend growth stocks that are attractive for long-term investors. In this article, we’ll review how the Dividend Aristocrats might fit into an income investor’s long-term portfolio.
Let’s dive in.
Why Income Investors Should Consider The Dividend Aristocrats
There are many ways people can generate passive income. Some people might start a side gig to make extra money, while others might invest in real estate property. At Sure Dividend, we believe investors looking for passive income should consider investing in high-quality dividend growth stocks.
Investing in stocks allows people to generate passive income with virtually no work. Whereas starting a side job or becoming a landlord are extremely labor-intensive, owning stocks requires little effort. Dividend stocks provide regular income each year. Even better, quality dividend growth stocks such as the Dividend Aristocrats have the ability to raise their dividend stocks every year.
With interest rates at historic lows, income is hard to find for investors. This gives investors even more reason to consider the best dividend stocks for passive income.
Dividend Aristocrats Overview
The Dividend Aristocrats are a group of 65 stocks in the S&P 500 Index that have raised their dividend payouts for at least 25 consecutive years. Some dividend stocks have maintained even longer histories of dividend growth than just the requisite 25 years. In addition, to join the list of Dividend Aristocrats, a company must be included in the S&P 500 Index, have a market cap of at least $3 billion, and an average daily value traded of at least $5 million for the three months prior to the rebalancing date.
It is not easy to join the ranks of the Dividend Aristocrats, which explains why there are only 65 Dividend Aristocrats in an index of 500 different companies. Conceptually, this makes sense, as any given 25-year period is bound to experience multiple challenges such as economic recessions, wars, geopolitical concerns, and more. But the Dividend Aristocrats continue to raise their dividends each year, including 2020 when the coronavirus pandemic was a huge drag on the global economy.
The Dividend Aristocrats are also appealing for investors who are specifically looking to generate income. The Dividend Aristocrats have proven their quality, with returns that match the broader market, but with significantly higher yields.
For example, according to Standard & Poor’s, the Dividend Aristocrats generated annual returns of 13.5% in the past 10 years. The broader S&P 500 Index also returned 13.5% per year in the same 10-year period. The Dividend Aristocrats matched the performance of the S&P 500 Index over the past decade, but did so with a higher average yield. Collectively, the S&P 500 Index has an average current yield of 1.5%, while the Dividend Aristocrats collectively yield 2.6% right now. This is a significantly higher level of dividend income, which is especially important in a low-rate investing climate.
There are multiple ways to invest in the Dividend Aristocrats. Investors can do so by purchasing an exchange-traded fund. The major ETF that tracks the Dividend Aristocrats list is called the ProShares S&P 500 Dividend Aristocrats ETF which trades under the ticker NOBL. This gives investors the opportunity to purchase all the Dividend Aristocrats in one basket. Alternatively, investors can purchase the Dividend Aristocrats individually. Here is one Dividend Aristocrat that investors can count on for consistent dividend increases each year.
Dividend Aristocrat For Passive Income: Johnson & Johnson (JNJ)
Johnson & Johnson, or J&J, is a Dividend Aristocrat from the healthcare industry. It is a diversified healthcare giant with a market capitalization of $427 billion, which makes it a mega-cap stock. Johnson & Johnson was founded in 1886 and employs more than 125,000 people around the world. The company has annual sales in excess of $90 billion.
High-quality dividend growth stocks like J&J have world-class businesses. J&J has one of the strongest brands in the global healthcare industry, which allows it to generate steady profits even when the economy is in recession. In turn, this gives quality Dividend Aristocrats like J&J the ability to continue raising their dividends each year. J&J continued to perform strongly even in 2020, when the coronavirus pandemic sent the U.S. economy into a recession. In the fourth quarter, the company grew revenue by 8% while adjusted earnings-per-share declined just 1% year-over-year. For 2020, revenue increased 0.6% while adjusted earnings-per-share declined 7.5%.
The company did see earnings decline last year, but even so, J&J remained highly profitable, so the company increased its dividend last year and will certainly do so again in 2021. Johnson & Johnson has increased its dividend for over 50 years in a row. Assuming the global economy continues to recover from the pandemic, J&J has a positive growth outlook. The company expects revenue of $90.5 billion to $91.7 billion and adjusted EPS of $9.40 to $9.60 for 2021. With a dividend payout ratio estimated at less than 50% for 2021, there is ample room for Johnson & Johnson to continue increasing its dividend.
Final Thoughts
The global economy faces uncertainty with the ongoing coronavirus pandemic as a lingering challenge. But the Dividend Aristocrats continue to prove their worth, by generating stable profits and paying steady dividends to shareholders year after year. Even better, the Dividend Aristocrats raise their dividends each year. For all these reasons, we believe quality dividend growth stocks such as the Dividend Aristocrats are among the best stocks to buy for long-term passive income.
Thanks again to Bob and the team at Sure Dividend for sharing their thoughts.
Related:
How I Got to Averaging $1,000 a Month in Passive Income
Income, Assets, and Wealth Formula
8 Income Producing Assets for Wealth Building
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Great article Bob. I’m a huge fan of dividend aristocrats and they comprise a majority of my portfolio. It’s definitely a slow path to wealth, but with enough time to let compounding takes effect, it can be a viable path to financial freedom.
Part of the problem with reliable dividend payers like the dividend aristocrats is they’re all large caps. That means that a lot of growth has been baked out of them already. So if you’re going to buy, you should adjust your expectations accordingly – they probably won’t be x10 or x20 baggers.