What is a dividend aristocrat stock?
A dividend aristocrat is a stock that has consistently increased their dividend payout consistently over the past 25 years or longer.
Dividend aristocrats are attractive to investors, because over time the amount of income the investor receives increases. This can provide income to reinvest in the market or provide an income for individuals in retirement.
Dividend reinvestment is one of the key ways that you can increase your investment portfolio to the point where you are financial independent. You can calculate your financial independence number using the 4% rule. This is the amount when portfolio reaches an amount where you can live off 4% of your investment returns and maintain portfolio amount.
Stocks that pay dividends will help compound your portfolio to reach your FI number as well as provide income in “retirement”. I put quotes around retirement, because I do not really ever plan on retiring because I love being productive, but I do want to reach Financial Independence so I can work on things I enjoy rather than earn a high paying salary.
You should carefully curate your portfolio to include dividend aristocrats.
Dividend aristocrats tend to be less volatile than the overall market and have greater returns than the overall market.
These are 7 dividend aristocrat stocks worth consideration being added to your portfolio:
- PEP – PepsiCo
- KMB – Kimberly Clark
- LEG – Leggart
- TROW – T.Rowe Price
- ED – Consolidated Edison
- GD – General Dynamics
- NUE – Nucor
Before you invest in any stock you need to do your homework. Morningstar is a great resource to do stock research. As a dividend investor you are interested in businesses that are generating health free cash flow and that free cash flow is increasing.
Free Cash Flow (FCF) = Operating Cash Flow – Capital Expenditures
Whenever you are investing you need to do your homework and have a strategy. Dividend investing considerations:
- Stock price – The name of the dividend game is shares. You want to purchase as many shares as possible in order to get the most dividends possible. The more shares, the more cash you receive every quarter.
- Dividend amount – What is the actual amount of the dividend? Some stocks pay a high dividend, but also have a high share price.
- Dividend yield – What is the dividend payout relative to the share price. You want to try and get stocks that pay a high dividend, but also also relatively inexpensive. But watch out if the dividend payout is too high the business may be sacrificing future growth in order to pay out dividends today. This is the reason some companies pay no dividend. They want to use all of their capital for future growth.
- Consistent dividend increase amount and percentage – You want to make sure the business is consistently growing their dividend in the first place. Then by how much and how often? Yearly? Every 10 years. This growth matters because of you and your timeline. We as humans are not going to live forever. You need to find stocks first great businesses that are going to last and then ones that fit your financial independence timeline.
- Stock volatility – Stock market investing is not for everyone. Some people cannot handle a drop in the market. My father is this type of person. He is invested in Treasury bonds, because he wants a guaranteed return. Dividend aristocrats tend to be less volatile than their counterparts, but look at the history of the stock you are going to choose.
Diversify your portfolio or choose an index fund. There are index funds that focus primarily on dividend stocks.
Even when you are diversified you are still at risk of systemic market swings in price. But if you ride it out you will recover your money.
Choose your stocks and move on.
Once you had done your research, choose 3 great stocks and move on. Life is lived outside the real world, not on the iphone or computer.
Your portfolio will perform better if you consistently invest without changing or tinkering with your strategy.
Now I want to know what stocks and strategies you are using to reach FI. Leave a comment or email me: