Investing in dividend-paying stocks is a tried-and-tested method of generating passive income. But not all dividend stocks are created equal. Some offer better opportunities than others. So where do you find them? One great place for investors to find good and sustainable dividend-paying stocks is through a dividend aristocrat.
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 profit given to shareholders as a reward, depending on how many shares they own.
Dividend stocks are therefore the stocks of companies that usually pay out dividends to their shareholders.
What is a dividend aristocrat?
A dividend aristocrat is a company that has paid and increased its dividend payout 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 solid track record of increasing profits every year
The S&P 500 Dividend Aristocrats Index is the best-known listing of dividend aristocrats in the world. The S&P 500 is a stock market index that tracks the performance of 500 of the biggest publicly listed companies in the United States.
Companies on the S&P 500 Dividend Aristocrats Index must:
- Have consistently raised dividends in the past 25 years
- Be a member of the S&P 500
- Have a market capitalisation of at least $3 billion
- Have an average daily trading value of at least $5 million
As seen, this is a very high bar that only a handful of companies can achieve, let alone maintain over time. At the moment, there are only 65 dividend aristocrats in the S&P 500 index.
The list is reviewed each year. If a company falls off the list for skipping a dividend increase in a particular year, it must wait another 25 years to get back on this list.
How can you invest in one?
To invest in the stocks of a dividend aristocrat, all you need is a share dealing account from a provider who gives you access to their stocks. There are many such providers in the UK. To help you narrow down your choices, we’ve prepared this list of top providers of online share dealing accounts in the UK.
You can also invest in a dividend aristocrat through a stocks and shares ISA, which comes with added tax benefits.
You don’t have to pay tax on the proceeds of stocks held in a stocks and shares 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 withholding tax deducted at source in the country where the stock 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 share dealing or stocks and shares ISA provider before making a purchase. This will reduce the withholding tax levied from the standard 30% to 15%.
Note that tax treatment depends on your specific circumstances and may be subject to change in the future.
Should you invest in a dividend aristocrat?
This is a personal decision.
Of course, there is no such thing as a sure thing when it comes to investing. Dividends are not always guaranteed. If a company’s earnings are low in a given year, its dividends may be reduced.
That being said, the strong business fundamentals of dividend aristocrats coupled with proof of dividends consistently increasing over time means they are considered one of the most stable dividend income sources for investors.
So, if you are looking for more diversification in your income-oriented portfolio, dividend aristocrats are certainly worth a look. As with any investment, however, don’t forget to do your research before you part with your money.