Tuesday, October 20, 2009

What a Company Needs to be a Dividend Aristocrat

As dividend investors, we know how big a deal it is for a company to be part of the elite dividend aristocrat list. To get on this list, a dividend stock must have increased its dividend for a total of 25 consecutive years. Of course, it isn't an infallible list of companies, but an investor could do a lot worse by further investigating companies that make it to the list.

That being said, a company does not simply just make the dividend aristocrat list by increasing dividends for 25 years in a row. There are a number of other factors that S&P must see for the company to make it to the list. What are those items? Let's take a look.

According to the most recent Dividend Aristocrat fact sheet (pdf), these are the criteria a company must exhibit to make it onto the list:

  • Universe. Companies must be a member of the S&P 500.
  • Financial Viability. Companies must have increased dividends every year for at least 25 consecutive years.
  • Size. Companies must have a float adjusted market capitalization of at least US$ 3 billion as of the rebalancing reference date.
  • Liquidity. Companies must have an average trading volume of at least US$ 5 million for the six-months prior to the rebalancing reference date.
  • Reconstitution. Index constituents are reviewed annually each December.
  • Stock Diversification. At each rebalancing, the minimum number of constituent stocks should be 40.
  • Sector Diversification. Classification, using the Global Industry Classification Standard (GICS®)1, should not result in constituent stocks in a particular GICS sector accounting for more than a 30% weight in the index.
As you can see there are some volume and size limitations on stocks that meet the criteria. Dividend Aristocrats are big companies. However, even with these criteria it is not enough to just go and guy any stock that is on the list. Be sure to further research each stock before buying any of them.

This article was written by The Dividend Guy. You may email questions or comments to me at info@thedividendguyblog.com.

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