What is a dividend aristocrat?
Investing in dividend paying stocks is a proven method of generating passive income. But not all dividend-paying stocks are created equal. Some offer better opportunities than others. So where do you find them? A dividend aristocrat is a great place for investors to find good, sustainable stocks that pay dividends.
Let’s take a look at what Dividend Aristocrats are and how you can invest in them to create a steady stream of passive income.
What is a dividend?
Before we get into dividend aristocrats, let’s define what a dividend is.
Dividends are basically a small portion of a company’s profits given to shareholders as a reward, based on the number of shares they own.
Dividend stocks are therefore the stocks of companies that generally pay dividends to their shareholders.
What is a dividend aristocrat?
A dividend aristocrat is a company that has paid and increased its dividends to shareholders over a long period of time.
Generally, these companies tend to:
- Be large and established with strong business fundamentals
- Be leaders in their industries
- Have little debt
- Have a strong track record of increasing profits every year
the S&P 500 Dividend Aristocrats Index is the world’s most famous list of dividend aristocrats. The S&P 500 is a stock market index that tracks the performance of 500 of the largest publicly traded companies in the United States.
S&P 500 Dividend Aristocrats Index companies must:
- Have steadily increased dividends over the past 25 years
- Become a member of the S&P 500
- Have a market capitalization of at least $ 3 billion
- Have an average daily business value of at least $ 5 million
As we can see, this is a very high bar that only a handful of companies can achieve, let alone maintain over time. Currently, there are only 65 Dividend Aristocrats in the S&P 500 Index.
The list is reviewed annually. If a company falls off the list for ignoring a dividend increase in a given year, it has to wait another 25 years to get back on that list.
How can you invest in one?
To invest in the shares of a dividend aristocrat, all you need is a stock trading account from a provider that gives you access to their shares. There are many such providers in the UK. To help you narrow down your choices, we’ve put together this list of the top UK online stock trading account providers.
You can also invest in a Dividend Aristocrat through an Equity and Equity ISA, which comes with additional tax benefits.
You do not have to pay tax on the proceeds of the shares held in an Equity and Equity ISA. This includes foreign stocks such as those of companies in the S&P 500 Dividend Aristocrats Index. In this scenario, your only tax loss will be the withholding tax withheld at source in the country where the share is held.
However, you can reduce the amount of tax paid on dividends received from a foreign dividend aristocrat by submitting a W-8BEN form to your stock or stock trading ISA provider before making a purchase. This will reduce the withholding tax levied on the standard from 30% to 15%.
Note that the tax treatment depends on your particular situation and may be subject to change in the future.
Should you invest in a dividend aristocrat?
It’s a personal decision.
Of course, there is no certainty when it comes to investing. Dividends are not always guaranteed. If a company’s profits are low in a given year, its dividends may be reduced.
That being said, the strong business fundamentals of the dividend aristocrats, coupled with the evidence that dividends are steadily increasing over time, means they are considered one of the most stable sources of dividend income for investors.
So if you’re looking for more diversification in your income-focused portfolio, Dividend Aristocrats are definitely worth checking out. As with any investment, however, be sure to do your research before you part with your money.
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