Today, on 20 December 2023, we will discuss companies known as dividend aristocrats in financial circles. We will explain their differences, the criteria they meet, and specify the most prominent representatives. Additionally, we will explore methods, advantages, and risks of investing in their shares and conduct a technical analysis of the Cboe S&P 500 Dividend Aristocrats Target Income Index.

What are Dividend Aristocrats?

Dividend aristocrats represent companies that have consistently paid and increased dividends over a long period. Their stocks are part of the baskets of the S&P 500 Dividend Aristocrats Index and the Cboe S&P 500 Dividend Aristocrats Target Income Index.

For a stock to be included in these indices, the company must meet the following criteria:

  1. Regular dividend payouts and increases for at least 25 consecutive years
  2. Membership in the S&P 500

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Dividend aristocrats: overview for 2023

The S&P 500 Dividend Aristocrats Index was established by S&P Dow Jones Indices in 2005 and comprises stocks of companies eligible for dividend aristocrats. At the time of writing, the members list includes 67 issuers.

The Cboe S&P 500 Dividend Aristocrats Target Income Index was developed by Cboe Global Markets with S&P Dow Jones Indices in 2017 to enable investors to invest in stocks of the S&P 500 Dividend Aristocrats Index companies with a higher target yield.

Top 10 S&P 500 Dividend Aristocrats Index stocks by weight

According to S&P Dow Jones Indices data as of 30 November 2023, the top 10 companies by index weight include:

NoCompanyMarket Capitalisation in USDSector
1Target Corp. (NYSE: TGT)61.78 BlnConsumer Staples
2Ecolab Inc. (NYSE: ECL)54.67 BlnMaterials
3S&P Global Inc. (NYSE: SPGI)131.73 BlnFinancials
4Sherwin-Williams Co (NYSE: SHW)71.36 BlnMaterials
5Clorox Co (NYSE: CLX)17.78 BlnConsumer Staples
6PPG Industries Inc (NYSE: PPG)33.48 BlnMaterials
7Nucor Corp (NYSE: NUE)41.79 BlnMaterials
8International Business Machines Corp (NYSE: IBM)144.78 BlnInformation Technology
9Cardinal Health Inc. (NYSE: CAH)26.39 BlnHealth Care
10Stanley Black & Decker Inc. (NYSE: SWK)13.94 BlnIndustrials

Distribution of companies in the S&P 500 Dividend Aristocrat Index by sectors

  • Consumer Staples – 25.1%
  • Industrials – 22.5%
  • Materials – 12.3% 
  • Financials – 10.7%
  • Health Care – 10.1%
  • Consumer Discretionary – 4.5%
  • Real Estate – 4.5%
  • Utilities – 4.4%
  • Information Technology – 3.2%
  • Energy – 2.6%

How to invest in dividend aristocrats

  • Companies’ shares. An investor can buy securities in specific companies included in the S&P 500 Dividend Aristocrats Index or all the companies on the list
  • ETF. An investor can invest in exchange-traded funds tracking the performance of the S&P 500 Dividend Aristocrats Index, such as the ProShares S&P 500 Dividend Aristocrats ETF (NOBL)

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Advantages of investing in dividend aristocrats

  • Stable income. Dividend aristocrats must increase their dividend payments over a long period, ensuring stable and growing earnings for their investors
  • Capital growth. Investments in stocks of such companies may also yield profits through appreciation, as issuers capable of increasing dividends often demonstrate successful operations and capital growth
  • Hedge against inflation. Increased dividend payouts help counteract the impact of inflation on investments
  • Reliability and confidence. Dividend aristocrats are often large and stable companies with a long-term history of successful dividend payouts, typically instiling investor confidence in them as reliable assets
  • Diversification. Companies included in the S&P 500 Dividend Aristocrats Index and the Cboe S&P 500 Dividend Aristocrats represent various economic sectors, allowing investors to diversify their portfolios and spread risks
  • Attractiveness for long-term investments. Stocks of dividend aristocrats are favoured by major investment funds. For example, Berkshire Hathaway Inc. (NYSE: BRK.A) purchased Coca-Cola Company (NYSE: KO) shares as far back as 1989 and still holds 400 million shares in its portfolio

Risks and challenges of investing in dividend aristocrats

  • Dividend aristocrats can be affected by economic downturns, market volatility, geopolitical events, and other factors that hurt the entire market or a specific sector
  • Companies, in their pursuit of stable payments and increased dividends, may reduce financing for business development projects
  • In their aim to ensure stable payouts and increase dividends, companies may finance business development projects by raising borrowed capital and thereby increasing a debt load
  • Despite having a long-term history of increased dividend payouts, corporations may encounter serious financial difficulties that may force them to reduce or suspend dividend payments
  • The popularity of dividend aristocrats may lead to an overvaluation of their shares, reducing potential returns for new investors
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Economic factors influencing dividend aristocrats

  • Economic cycle. During periods of economic growth, dividend aristocrats may increase dividend sizes. However, during a recession or downturn, they may face pressure to reduce payments
  • Inflation. Rising prices of goods and services may reduce the purchasing power of dividends unless they grow accordingly to offset inflation
  • Interest rates. A high level of this indicator can make alternative investments such as bonds more attractive to investors, exerting pressure on the prices of dividend aristocrat stocks. Conversely, interest rate cuts can make high-dividend shares more appealing
  • GDP growth. Rapid economic growth may boost companies’ earnings, and, consequently, dividend payouts
  • Fiscal and monetary policy. For example, changes in dividend tax rates may affect the size and structure of dividend payments
  • Global factors. Geopolitical conflicts, trade wars, and other global events may impact the global economy, affecting dividend aristocrats that depend on international markets
  • Labour market. Unemployment and pay rates may affect consumer demand, thereby influencing companies’ earnings and their ability to pay dividends
  • Exchange rate volatility. Fluctuations in exchange rates of currencies playing an important role in revenue conversion from a foreign currency to the US currency may affect the finances of companies generating a significant part of their earnings beyond the US

Technical analysis of the Cboe S&P 500 Dividend Aristocrats Target Income Index

Since January 2022 and at the time of writing, the Cboe S&P 500 Dividend Aristocrats quotes have been trading within a sideways channel, with the upper boundary at 605 points and the lower at 500 points. During March and October 2023 setbacks, the quotes did not reach the channel’s lower boundary but tested support at 536 points. This indicates potential bullish pressure and an inclination to secure a position above the upper channel boundary. In such a scenario, the target for buyers could be the 735 points level.

However, there are risks of a bearish correction preceding a potential breakthrough of the channel’s upper boundary. A rebound from the resistance line on the RSI might signal a possible decline in index quotes. The previous rebound from this level was observed on 27 July 2023, leading to an 11.90% decrease in index quotes.

In this scenario, the target for the downward movement could be the support level at 585 points. As index quotes decline, RSI values may stabilise near the 50 level. Buyers might be willing to move upward again after such a reduction in RSI values from critical levels above 80.

Bulls may face a negative scenario if the quotes secure below 580 points, indicating a likely breakthrough of the lower boundary of the short-term ascending channel. This development could trigger a more pronounced downward momentum towards 535 points.

Technical analysis of the Cboe S&P 500 Dividend Aristocrats Target Income Index*

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Conclusion

Dividend aristocrats represent companies that have consistently paid and increased dividends for at least 25 years. They are members of the S&P 500 Dividend Aristocrats Index and the Cboe S&P 500 Dividend Aristocrats Target Income Index. At the time of writing, the first index basket comprised stocks of 67 dividend aristocrats. According to November 2023 data, almost half of these companies represent the consumer staples and industrial sectors.

A technical analysis of the Cboe S&P 500 Dividend Aristocrats Target Income Index chart shows that the quotes have been moving within a sideways channel since January 2022, and a breakout of the upper boundary could occur, likely preceded by a bearish correction.

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* – Past performance is not a reliable indicator of future results or future performance.

The material presented and the information contained herein is for information purposes only and in no way should be considered as the provision of investment advice for the purposes of Investment Firms Law 87(I)/2017 of the Republic of Cyprus or any other form of personal advice or recommendation, which relates to certain types of transactions with certain types of financial instruments.

The stock charts in this article are provided by the TradingView platform, which offers a wide range of tools for analysing the financial markets. It is a convenient, high-tech online market data charting service that allows users to perform technical analysis, research financial data, and communicate with other traders and investors.