Investing in 'Dividend Aristocrats'

It’s an understatement to say that  2009 was a lousy year for dividends. According to Standard & Poor’s, last year was the worst year ever for dividends. Dividend cuts caused investors to lose $58 billion in income over the year.

For 2009 overall, more than 800 companies cut their dividend payments, according to S&P. That was nearly 200 more than in 2008 and more than seven times the number of cuts in 2007.

Despite the dividend carnage in 2009 (and 2008), a number of stocks continued to raise their dividends, keeping intact dividend streaks that extend for at least a quarter century. These “Dividend Aristocrats,” so named by S&P for their dividend prowess, have increased dividends annually for at least 25 consecutive years, according to S&P.

Consumer-oriented stocks are well represented on the list. PepsiCo (NYSE: PEP) and Procter & Gamble (NYSE: PG) are long-time recommendations of DRIP Investor and members of the Editor’s Portfolio. One reason I like these stocks is their long history of boosting their dividends. Procter & Gamble has an especially impressive record of boosting its dividend for more than 50 years.

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Such retailers as Wal-Mart (NYSE: WMT) and Walgreen (NYSE: WAG) have also consistently boosted dividends. Overall, consumer staples and consumer discretionary stocks comprise nearly 42% of the Dividend Aristocrats.

Interestingly, financials, typically a group filled with dividend payers, represent only 7% of the S&P 500 Dividend Aristocrats. The fallout in the banking and financial-services sectors in 2008 and 2009 fueled a number of dividend cuts and omissions in fi nancials, thus trimming their ranks from the Dividend Aristocrats.

One financial stock still remaining on the list is Aflac (NYSE: AFL), a provider of supplemental insurance products primarily in Japan. I think Aflac is one of the better buys among Dividend Aristocrats

How have the Dividend Aristocrats performed as a group over the years? According to S&P, the 2009 S&P 500 Dividend Aristocrats were up 27% in 2009 versus a 26% increase in the S&P 500 Index. And what was a decent showing during a horrible market, the 2008 S&P 500 Dividend Aristocrats were down 22% versus a 37% decline in the S&P 500 Index.

As a dividend portfolio, the Dividend Aristocrats have plenty of appeal. First, I like the diversification of the stocks across 10 different sectors. That is important when creating a dividend portfolio. Too often dividend-based portfolios become over weighted in just a couple of sectors, such as utilities and financials.

I also like the fact that the primary selection criteria for Dividend Aristocrats focuses on dividend growth and not yield. To be sure, these 43 Dividend Aristocrats had an aggregate yield of nearly 3% at the beginning of this year, not too shabby and nearly 50% more than the yield on the S&P 500 Index.

While investing in individual positions in all of these Dividend Aristocrats may be difficult for most investors, there is another way to gain representation in these and additional Dividend Aristocrats that are not in the S&P 500. An exchange-traded fund — SPDR S&P Dividend (NYSE: SDY) — has been created to create an investable portfolio of these and additional Dividend Aristocrats from the S&P 1500 Index.

The fund mimics the S&P High Yield Dividend Aristocrats Index. This index is designed to measure the performance of the 50 highest dividend yielding S&P Composite 1500 constituents that have followed a managed dividends policy of consistently increasing dividends every year for at least 25 years.

The ETF offers a quick and easy way to focus some of your capital in a portfolio focused on a cross-section of consistent dividend growers. The SPDR S&P Dividend ETF returned +19% in 2009 and -23% in 2008. The ETF currently yields approximately 4.0%.

Learn more about this financial newsletter at The DRIP Investor.