Stock Screen: The Return of the Dividend Aristocrats

S&P combs its list of those companies that have boosted their dividends in each of the last 25 years for the names with top STARS rankings

The S&P 500 Dividend Aristocrats index is designed to measure the performance of S&P 500 constituents that have followed a policy of consistently increasing dividends every year for at least 25 years. The index is equal-weighted, with constituents re-weighted every quarter. Membership is reviewed each December. Due to the extreme market fluctuations during the past few months, the $3 billion market cap requirement was not used as a screening criterion for this year's annual rebalancing.

Not surprisingly, considering the overwhelming bad news in the financial-services sector, several banks and financial-services institutions were dropped from the list this year, including Bank of America (BAC), Comerica (CMA), Fifth Third Bancorp (FITB), KeyCorp (KEY), Progressive (PGR), and Regions Financial (RF). But even in a year when many companies sought to hoard their cash on hand, two new companies were added to the Dividend Aristocrats list: Bemis (BMS) and Legg Mason (LM).

The list at the bottom of this page features all of the Dividend Aristocrats that also garner a 4 STARS (buy) or 5 STARS (strong buy) recommendation from S&P equity analysts.

Since 1926, dividends contributed to approximately one-third of total return while capital appreciation contributed two-thirds. Therefore, both sustainable dividend income and capital appreciation potential are important to total return expectations. Managers use stable and increasing dividends as a sign of confidence in their firm's prospects, while investors consider such track records as a sign of corporate maturity and strength.

Growth and Value

The S&P 500 Dividend Aristocrats Class of 2009 includes 52 securities diversified across 10 sectors. The constituents have both growth and value characteristics. The composition of the S&P 500 Dividend Aristocrats contrasts with that of typical dividend-oriented lists and benchmarks that have high exposure to the financials and utilities sectors and have a steep value bias.

Another way to invest in this elite group is through an exchange-traded fund: SPDR S&P Dividend (SDY), which is based on the S&P Dividend Aristocrats index and also includes constituents from the S&P 1500.

"Last year was bad, and this year started off worse," says Howard Silverblatt, senior index analyst for S&P Index Services, which operates independently from S&P Equity Research. "My 2009 estimate is for a 13.3% reduction in actual cash dividends, the worst decline since the 16.9% decline in 1942. This translates into a pay cut for dividend investors of $33.2 billion, not exactly a stimulus package."

Though Silverblatt says there is likely more bad news to come, he notes there are also stocks that are paying and/or increasing dividends and that maintain "decent" coverage ratios. "Within the S&P 500, I found 43 issues that had increased their annual dividends at least 10 years in a row and have current and projected dividend coverage rates of at least two," he says. "This is a starting point, but the fun is picking the issues. Dividend investors hold stocks for years, often using the dividend reinvestment plans. What they need to do is pick issues that have a proven track record on dividends, and are currently producing sufficient cash flow to cover their business and their dividends, and grow both."

Top-Ranked S&P Dividend Aristocrats
Company Ticker Price (2/26/09) Yield (2/26/09) S&P STARS (5=Strong Buy, 4=Buy)
Abbott Laboratories ABT 50.58 3.16% 5
Aflac AFL 18.96 5.91% 5
Archer-Daniels-Midland ADM 27.11 2.07% 4
BB&T BBT 17.04 11.03% 4
Becton, Dickinson BDX 65.10 2.03% 4
CenturyTel CTL 26.06 10.74% 4
Chubb CB 39.43 3.35% 5
Coca-Cola KO 41.07 3.99% 5
C.R. Bard BCR 81.36 0.79% 5
ExxonMobil XOM 70.95 2.26% 5
Family Dollar Stores FDO 27.09 1.99% 5
Johnson & Johnson JNJ 52.44 3.51% 4
Lowe's LOW 15.92 2.14% 4
McDonald's MCD 52.20 3.83% 5
PepsiCo PEP 49.42 3.44% 4
Procter & Gamble PG 48.97 3.27% 5
3M MMM 46.33 4.40% 4
Wal-Mart Stores WMT 48.25 1.97% 5
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