Introduction by The Prolific Investor
As most of you know, I invest primarily in Alternative Investments, so you’re probably surprised to see this article on my site. Let me explain. I recently became acquainted with Ben Reynolds of SureDividend.com and was intrigued with their philosophy of investing in stocks with a track record of increasing dividend levels over time. If I wanted to do more stock market investing, I would certainly be looking at this strategy as it more closely resembles what I’m looking for in an asset, which is cash flow. Please enjoy the following guest post.

Why Income Investors Should Consider Dividend Aristocrats
By Josh Arnold of Sure Dividend for The Prolific Investor

When finding the best stocks to buy, investors have no shortage of choices. But buying the best dividend stocks with long dividend increases is still a proven model for investors trying to build sustainable, growing investment income over time from their stock portfolio.

In this article, we’ll discuss why buying Dividend Aristocrats is one of our favorite income investing strategies.

Overview of the Dividend Aristocrats
The Dividend Aristocrats are a group of just 65 stocks that meet certain criteria that, when combined, make a highly exclusive club. First, all Dividend Aristocrats must be constituents of the S&P 500, which is an index of 500 of the largest stocks in the US. Second, they must meet certain size and liquidity requirements such that investors can easily buy and sell with small bid/ask spreads. Third, critically, they must have at least 25 consecutive years of dividend increases to be a Dividend Aristocrat.

This combination of factors means that only the best dividend stocks make the cut. In order to produce that sort of dividend increase streak, the company must have a high-quality, resilient business that affords it the ability to pay ever-higher amounts of cash to shareholders. Without some measure of competitive advantage and recession resilience, this would not be possible.

In addition, Dividend Aristocrats have management teams with both the willingness and ability to pay higher amounts to shareholders over time. Without all of these factors, the company would not be able to reach the prestigious milestone of at least 25 years of consecutive dividend increases.

Why Investors Should Favor Dividend Aristocrats
Investors looking to generate growing income over time should start with the Dividend Aristocrats because their business models have stood the test of time. Any 25-year period contains at least one recession, along with technological changes that could see weak businesses struggle, and therefore not be able to continue to increase their dividend. The idea behind starting with Dividend Aristocrats is because they tend to perform relatively well during recessions. They also tend to produce growing earnings over time, and their yields, on average, are higher than that of the broader market.

For investors looking to generate durable, growing income over time, these criteria are critical. After all, for investors with long time horizons, buying the latest fad in the market isn’t a sustainable strategy; investors need companies with durable business models that can raise their payout even in the worst economic scenarios. Companies on this list tend to see smaller earnings declines during recessions, and possess enough safety in the dividend to be able to continue to raise it even during these tough times.

Given that the Dividend Aristocrats have paid higher dividends for at least 25 consecutive years, their yields also tend to beat those of the average dividend stock. Indeed, with the S&P 500 yielding just 1.5% today, the Dividend Aristocrats have an average yield of 2.1%. That level of outperformance compounded over years of investing can make a sizable difference to the amount of income that an investor can generate from their portfolio. And keep in mind that the Dividend Aristocrats have a much higher likelihood of continuing to raise their payouts over time than the average stock, so the yield on an investor’s cost tends to go much higher through the years.

Dividend Aristocrats We Like Today
Given these criteria, let’s take a look at two Dividend Aristocrats we like today for their combination of current yield, dividend safety, recession resilience, value, and dividend growth potential. First up is AT&T (T), a telecommunications giant that originated in the late-1800’s as a telephone service provider. Since then, AT&T has expanded into many kinds of communications, as well as entertainment to become a diversified conglomerate with $170 billion in annual revenue.

AT&T offers investors a massive current yield, which stands at 7%. That kind of yield is nearly unheard of for a Dividend Aristocrat. Indeed, AT&T has increased its payout for an impressive 36 consecutive years, making its current yield all the more impressive.

AT&T trades for just 9.2 times current earnings, which is well below our estimate of fair value at 11 times earnings. The company’s payout ratio is also just 64% of earnings, so the dividend is safe and has ample room to grow in the coming years. AT&T, therefore, offers investors a massive current yield, a cheap valuation, and a safe payout to go with its 36-year dividend increase streak.

Another example of a Dividend Aristocrat we like today is Federal Realty Investment Trust (FRT). The trust has a staggering 53-year streak of consecutive dividend increases, and is the only Real Estate Investment Trust in the market today with that kind of dividend longevity. The trust is exposed to retail real estate demand but its diversified properties in high-demand markets have thus far limited damage from COVID-19.

The stock trades today at about 15 times normalized FFO-per-share, which is in line with our estimate of fair value. In addition, investors get a 4.8% current yield and a dividend that is just 71% of normalized FFO-per-share. Investors should remember that REITs generally distribute the vast majority of their income to investors, so their payout ratios tend to be higher. In Federal Realty’s case, this does not signal that the payout is unsustainable because its business has proven so resilient over the past five decades.

Final Thoughts
When looking for dividend stocks, starting with the Dividend Aristocrats is a prudent path to take. These stocks offer very long payout increase streaks, generally high yields, recession resilience, and safe dividend payouts. These factors, when combined with finding the Dividend Aristocrats that have the best value proposition today can be a powerful force for investors.
We like Federal Realty and AT&T, among others, from this group for their value and current yield in particular. Like all Dividend Aristocrats, they have stood the test of time, weathered tough economic conditions, and adapted to an ever-changing world. We see Dividend Aristocrats as the best-of-the-best in terms of dividend investing.