A UK Dividend Aristocrat is generally defined as a company listed on the stock market with increasing or stable dividends for at least 10 consecutive years. For shares in the US S&P 500, it’s 25 years.
Considering the London Stock Exchange traces its roots back to 1698, it’s not surprising to find it packed with income royalty. Indeed, a handful of investment trusts have increased dividends for over 50 years!
Dividend Aristocrats tend to perform well over long periods. Their established market positions and stable earnings give them a defensive quality, which investors typically value during periods of turbulence.
Therefore, they can provide a resilient backbone to a stocks portfolio. To use a football analogy, I suppose it’s similar to having a sturdy defence. This solid base means the team is unlikely to fold every time it gets put under pressure.
A cherry-picking strategy
Thankfully, we don’t have to start rooting through the dividend track records of hundreds of stocks to compile a list. Some firms have already done that work for us and made specific Dividend Aristocrat exchange-traded funds (ETFs).
A popular one is the SPDR S&P UK Dividend Aristocrats ETF (LSE: UKDV). Here are its top 10 holdings.
ETF weighting
Intermediate Capital Group
5.79%
Legal & General
5.29%
Primary Health Properties
5.29%
IG Group
5.25%
National Grid
4.98%
British American Tobacco
4.83%
Hargreaves Lansdown
4.36%
Schroders
4.20%
Big Yellow Group
3.92%
Unilever
3.60%
At first glance, the list contains some excellent income stocks.
So, should I just invest in this ETF and forget about picking individual stocks?
Looking at its stagnant five-year share price, I’m going to say no.
Granted, there have been the regular dividends paid over this period, but the fund’s yield is only about 4.1% today.
I don’t find that very tempting when I can invest in shares of Legal & General and British American Tobacco individually and aim to double that yield.
Of course, those payouts aren’t guaranteed and, as in history, aristocrat status isn’t permanent.
But I do think a fruitful strategy would be to cherry-pick what I consider to be the best individual Dividend Aristocrats and build an income portfolio around those.
The importance of dividends
Since 1926, dividends have contributed approximately a third of the S&P 500’s total return, with share price appreciation making up the rest.
For the FTSE 100, it’s even more dramatic. According to data from wealth management firm Charles Stanley, putting £1,000 into the blue-chip index 20 years ago would have generated around £2,179 (as of February). But with dividends reinvested, it would be £4,577, more than double.
This points to the power of compounding returns.
Sacrificing yield
Looking at my own portfolio, one high-quality Dividend Aristocrat that stands out is spirits giant Diageo.
The starting yield isn’t the highest at 2.9%, and the firm is on the naughty step with investors after delivering a shock profit warning in November. This concern about a slowdown in sales hasn’t gone away, and may even intensify.
Yet I think its portfolio of premium brands — including Guinness, Smirnoff and Johnnie Walker — will stand the test of time. Meanwhile, the prospective payout is covered almost two times by forecast earnings.
I recently took advantage of share price weakness to buy more shares.
The post The UK stock market is rich with Dividend Aristocrats! appeared first on The Motley Fool UK.
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Ben McPoland has positions in Diageo Plc, Legal & General Group Plc, and National Grid Plc. The Motley Fool UK has recommended British American Tobacco P.l.c., Diageo Plc, Hargreaves Lansdown Plc, Primary Health Properties Plc, Schroders Plc, and Unilever Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
