Ironically, the only certainty in the stock market is uncertainty. Volatility is as old as the stock market itself and there is no reason to believe that it will stop happening in the future. Throw in levels of inflation we haven’t seen in 40 years and recession fears, and people are rightfully anxious about their finances right now.
There are no foolproof investments, but there are investments that have stood the test of time and have been shown to provide stability in times of economic uncertainty. If you’re looking for some stability, look no further. Dividend Aristocrats.
All Dividend Stocks Are Not Created Equal
Not all dividend-paying stocks get the advertised title of Dividend Aristocrat. To receive that title, a company must have increased its annual dividend payout for at least 25 consecutive years. It’s an achievement to even maintain a dividend for that long, so constantly increasing it over that long makes it all the more impressive.
Any business that has managed to earn the title of dividend aristocrat in 2022 has managed to increase its dividend since 1997, at the earliest. That means they’ve come through some of the toughest economic times the US has ever seen: the dot-com bubble (late 90s), the great recession (2008), and the COVID-19 pandemic (2020).
In times of uncertainty, it helps to know that the companies you’re investing in have weathered bad economic storms before and still manage to reward shareholders. That’s usually a sign of a business with a healthy balance sheet and good management, two things investors should look for in a company.
Two birds with one stone
If you want the benefits of Dividend Aristocrats while reducing some of the risks, you can invest in exchange traded funds (ETFs) that specifically focus on Dividend Aristocrats. take the ProShares S&P 500 Dividend Aristocrats ETF, for instance. It only has Dividend Aristocrats, but most of the companies it has have been raising their dividends for at least 40 years, meaning they are even more battle-tested.
ETFs focused on Dividend Aristocrats can also help you kill two birds with one stone by providing diversification. For example, the ProShares S&P 500 Dividend Aristocrats ETF contains companies from the top 11 sectors, with the top 10 holdings only accounting for about 18% of the fund (compared to the S&P 500, where the top 10 holdings account for more than 27%). It is a win-win for investors.
Help reinvest your cash dividend payments
Dividends, in general, can be rewarding, but investors can help maximize their potential by reinvesting them until retirement instead of receiving cash payments. Most brokers allow you to do this on their platforms and they will take care of all the mechanics for you.
To show the power of reinvesting dividends, let’s imagine we have two investors: one receiving cash dividends and one reinvesting them. Suppose you both invested $500 a month in the ProShares S&P 500 Dividend Aristocrats ETF. If it yielded, on average, 10% per year with a 2.5% dividend yield, this is what the account totals would look like after 20 years:
|Reinvest dividends?||Amount Contributed Over 20 Years||Account value after 20 years|
The investor who received cash dividends would have made money on them over the 20 years, but reinvesting the dividends would have made an account that is $114,000 larger over 20 years. Compounding earnings from reinvesting dividends are powerful.
Keep your eyes on the long-term prize
As a long term investor, you need to focus on that: the long term. While it’s not always easy, this means not letting short-term events in the stock market cause you to lose sight of your financial goals. It can be tempting to cut back or stop investing during down times or periods of uncertainty, but it’s rarely the right thing to do.
While nothing is guaranteed in the stock market, Dividend Aristocrats can at least give you more peace of mind that they will provide value despite broader economic conditions. If you’re a long-term investor, short-term price fluctuations don’t really matter. What matters is that you continue to receive your dividends during that time, and by the time you’re close to retirement, you’ve received a return on investment you’re comfortable with, something investors can trust with Dividend Aristocrats.
Stephen Walters has no position in any of the mentioned stocks. The Motley Fool holds and recommends ProShares S&P 500 Aristocrats ETF. The Motley Fool has a disclosure policy.
Leave a Comment