Dividend achievers are a group of stocks that consist of companies that have increased their dividends for at least 10 consecutive years. Investing in these companies is an efficient way for income-oriented investors to build wealth over time. These companies demonstrate a commitment to building shareholder value by prioritizing raising the payout on their dividend. As of June 2022, there are approximately 347 companies that are dividend achievers.
To achieve the status of dividend aristocrat a company must meet the following criteria:
- They must have at least 10 consecutive years of dividend increases
- They must meet have a minimum three-month average trading volume of at least $1 million.
In this article we’ll explain the significance of dividends and why dividend achievers can be an attractive option for investors.
What is a Dividend?
When you buy stock in a company, you take an ownership stake in the company. A dividend takes that one step further by distributing a percentage of its profits (known as the payout ratio) to investors as a dividend for owning the stock.
Many companies pay a dividend every three months (i.e. a quarterly dividend). That means that investors earn this dividend on a regular schedule no matter what is happening with the company’s stock price.
Why Do Companies Pay a Dividend?
Companies that pay a dividend usually do so because they are at a point in their business cycle that puts some upside limit on their growth. This doesn’t mean that the companies are in financial trouble. Many of these companies are large-cap companies that generate billions in revenue and have consistent earnings. They have sound balance sheets and generate significant free cash flow (FCF).
The downside of this consistency is that the companies don’t deliver the same growth as companies that are involved in sectors that deliver disruptive technology. And for that reason the stock price of these companies tends to underperform the overall market.
To help offset this relative lack of stock price appreciation, these companies will help increase their shareholders total return by issuing a dividend.
Dividends Help Increase Total Return
The total return on an investment includes interest, capital gains, dividends and other distributions that an investment generates over a period of time. If a company doesn’t issue a dividend, the total return of that investment is almost exclusively limited to capital gains. When the market is going up, these stocks can outperform the market. However when the market is in a correction or a bear market, the total return on these stocks can be significantly lower than broader market.
By contrast, dividend stocks offer investors a dividend in addition to the opportunity for capital gains. This has a smoothing effect on many portfolios. While these stocks may not outperform the market in terms of capital gains, the dividends can help move them closer. But these stocks really shine in times of market downturns. In this case, the stocks tend to perform “less badly” than growth stocks. In addition, the “rent” that investors collect from the dividend can help trim losses even more.
That’s because in most cases, investors have the ability to reinvest their dividends. This increases the amount of stock an investor owns which increases their capital gains as well as increasing their dividend payout. This creates a wealth-building cycle.
Dividend Achievers are Ideal for Fund Investors
Many investors enjoy selecting individual stocks with which to build their portfolio. However, other investors prefer to invest index funds. An index fund is designed to track the performance of a specific group of stocks. And because there are over 200 stocks to choose from, there is an index fund that tracks the performance of dividend achievers.
The NASDAQ Dividend Achievers index is correlated to the performance of more than 250 companies that meet the requirements to be a dividend achiever. The index is weighted based on market capitalization meaning that the companies in the index with the largest market capitalization have the most weight on the overall price of the index.
Fund-oriented investors can invest in one of several exchange-traded funds (ETF) that track the Dividend Achievers Index. The overall price of the index will closely approximate the value of all the companies in the index.
In addition to smoothing out the volatility that comes from investing in individual stocks, a dividend achiever ETF receives all the dividends paid from the individual companies and distributes them proportionately to the shareholders in the fund. Two of the most popular dividend achiever ETFs are the Vanguard Dividend Appreciation ETF (NYSEARCA:VIG) and the Invesco Dividend Achievers ETF (NASDAQ:PFM).
Some Final Thoughts on Dividend Achievers
Identifying dividend achievers is a sound strategy for building the income side of your portfolio. Not only do these companies have reliable, growing dividends but they’re likely to be companies that will offer some stock price appreciation that will boost an investor’s total return.
However, like any stock, a dividend achiever can be overvalued or undervalued at a given time. Therefore, getting the most out of dividend achievers requires a willingness to hold on to these stocks over time. To take the guesswork out of choosing individual dividend achievers, investors can buy shares in an exchange-traded fund that includes only stocks of companies that are dividend achievers.