Although many companies pay out dividends — mainly more established companies with less growth potential — there are different levels to dividend-paying companies. Companies that have managed to increase their annual dividend payout for at least 25 consecutive years are considered Dividend Aristocrats.
Here are three reasons you should consider Dividend Aristocrats for your retirement portfolio.
1. They can withstand bear markets
A bull market is defined as a prolonged period of steady stock price increases, while a bear market is defined by a steady decrease in stock prices. Historically, the stock market has shown it’s susceptible to both bull and bear markets, and neither will last forever. Investors love bull markets because their investments are increasing, but a bear market can cause some investors to panic when they see their portfolios decreasing.
One of the best things about dividend aristocrats is that they’ve shown that no matter what’s going on in the greater economy, their business is fundamentally sound enough to withstand down periods. Take beverage giant Coca-Cola, for example. For the past 59 years, Coca-Cola has increased its annual dividend. The same goes for Procter & Gamble, which has increased its dividend for 65 consecutive years.
During that time, both companies have withstood bear markets, recessions, and other rocky economic times, yet they’ve managed to keep their dividends and increase them.
2. Investors are rewarded regardless of stock price movements
There are two primary ways to make money from owning stocks: selling a stock for more than you paid for it and dividend payouts. While the former is the more obvious way, some investors may overlook how much money can be made from the latter. Dividends, which are generally paid out quarterly, are a way for companies to reward investors for holding onto their stock.
Imagine you invest in a dividend aristocrat like 3M, which has paid out dividends to its shareholders uninterrupted for more than 100 years and has increased its dividend payout every year for the past 64 years. Over the past five years, 3M has seen its stock price drop more than 20% (as of March 29, 2022), yet the company has paid out more than $28 in dividends per share during that time.
If you bought 10 shares of 3M at $191 in March 2017 and held onto those stocks until its current price of $152, you would have $390 in unrealized losses but made over $280 in dividends. If you’re a long-term investor, those short-term unrealized losses shouldn’t faze you as much because good, well-established companies find ways to flourish in the long run; an unrealized loss is only a loss of money if you decide to sell your investment. If the price goes back up to what you purchased it for, those dividends become pure profit.
3. They can help you earn thousands in yearly retirement income
Using dollar-cost averaging and making consistent investments in Dividend Aristocrats can prove to be a reliable source of income in retirement. Let’s imagine for the next 30 years that you purchase two shares monthly of each of the three stocks mentioned earlier. Here’s how much you can expect to be paid yearly in dividends from your total holdings:
Yearly Dividend Per Share
Annual Dividend Payout
Procter & Gamble
While these figures are based on each company’s fiscal-year 21 dividend payouts, the total would likely be more in a real-world scenario because part of being a Dividend Aristocrat is increasing your dividend payout year to year. Even in the above example, it results in over $7,860 in annual dividends payouts. Combined with potential 401(k) plan withdrawals and other retirement income sources like Social Security, this could help ensure you’re financially secure in retirement.
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