What Is the S&P 500 Dividend Aristocrats Index?

What Is the S&P 500 Dividend Aristocrats Index?

Let me explain what the S&P 500 Dividend Aristocrats Index is. It's essentially a curated list of companies from the Standard & Poor's 500 Index—commonly known as the S&P 500—that have demonstrated a solid history of increasing their dividends for at least 25 years in a row. Each of these companies holds an equal weight in the index, ensuring no single one dominates the overall performance.

Key Takeaways

You should know that the S&P 500 Dividend Aristocrats Index focuses on well-known large-cap, blue-chip companies within the S&P 500 that have boosted their dividends annually for at least 25 consecutive years. To qualify, these stocks must have a float-adjusted market capitalization of at least $3 billion and an average daily trading volume of no less than $5 million. Keep in mind, a company gets removed from this index if it doesn't raise its dividend or if it's ousted from the broader S&P 500 Index.

Understanding the S&P 500 Dividend Aristocrats Index

I'm diving deeper into how this index works. It monitors the performance of established large-cap blue-chip companies, and Standard & Poor's will drop any that fail to increase dividend payments from the prior year. The index undergoes rebalancing every quarter—in January, April, July, and October—to maintain its structure.

Beyond the dividend history, inclusion requires that stocks have a float-adjusted market cap of at least $3 billion and average daily trading volume of $5 million or more. The index mandates a minimum of 40 companies, and as of July 31, 2023, it boasts 66 constituents.

The real appeal of these dividend aristocrats is their proven ability to keep raising payouts to shareholders. That said, when you compare it to the S&P 500 overall, the Aristocrats index hasn't beaten it in 1-year, 3-year, or 5-year annualized returns as of August 28, 2023.

One point of criticism you'll hear is that some companies on this list rely on share buybacks to support those dividend hikes. The issue here is that a genuine dividend aristocrat should be increasing payouts organically year over year, and if a company is overpaying for its own shares, it might not be prioritizing shareholders' best interests, even if dividends are technically going up.

S&P 500 Dividend Aristocrats Constituents

These dividend aristocrats span multiple industries and sectors, and they've all been in operation for at least a quarter-century to meet the criteria. Some have been growing dividends for decades, like Emerson Electric Co. (EMR), which provides electronic products and engineering services to industrial clients.

Newer additions include companies like Roper Technologies (ROP), a software and product designer, and A.O. Smith (AOS), a maker of water heating and purification equipment, both of which joined in 2018. In January 2023, Nordson Corp, CH Robinson Worldwide Inc, and J.M. Smucker Co were added to the index.

Remember, even well-known blue-chip stocks aren't guaranteed a spot forever. A company can be removed if it skips a dividend increase for a year or gets booted from the S&P 500. The 2008 recession, for instance, led to the removal of major names like Bank of America (BAC), General Electric (GE), and Pfizer (PFE).

Top S&P 500 Dividend Aristocrats

As of July 31, 2023, about half of the companies in the S&P 500 Dividend Aristocrats fall into industrials (24.1%) or consumer staples (22.8%). Other key sectors include materials (12.5%), financials (11%), and healthcare (10.4%). Below, I'll list the top 10 individual companies by index weight at that time.

Investing in the S&P 500 Dividend Aristocrats

If you're looking to invest, exchange-traded funds (ETFs) offer a straightforward way to get exposure to these dividend aristocrats. A direct tracker is the ProShares S&P 500 Dividend Aristocrats ETF (NOBL).

There are other funds that focus on dividend stocks without strictly following the index, such as the iShares Select Dividend ETF (DVY), the SPDR S&P Global Dividend ETF (WDIV), and the iShares Core High Dividend ETF (HDV). These often include some aristocrats since the pool of consistent dividend growers isn't vast.

Frequently Asked Questions

How do I invest in the S&P 500 Dividend Aristocrats? The most direct method is through a fund that tracks the index, like one of the SPDR Aristocrats ETFs.

What is ProShares S&P 500 Dividend Aristocrats? It's an ETF from ProShares designed to mirror the S&P 500 Dividend Aristocrats Index, letting you invest in the group without buying each stock individually.

Does the S&P 500 pay dividends? The S&P 500 is just an index, so you can't invest in it directly, but funds that track it, like the SPDR S&P 500 ETF, will distribute dividends to you from the underlying stocks.

The Bottom Line

For those focused on dividends, tracking the S&P 500 Dividend Aristocrats Index via funds can be a solid approach, given that it's composed of companies with a 25-year streak of raising dividends. This adds a reliable income element to your stock investments.