The Dividend Aristocrats Lower the Bar

In today's low-rate environment, dividend stocks are more popular than ever as one of the only sources of substantial, dependable income. As income-producing alternatives have become increasingly ineffective in delivering the cold, hard cash that investors need, being able to separate high-quality dividend stocks from the rest of the dividend-paying crowd is a crucial skill.

One tool that dividend investors use to find the cream of the dividend-stock crop is the Dividend Aristocrats list. This elite group has proven itself by not only paying dividends but also raising them regularly over long periods of time. Yet just this week, the folks responsible for running the Dividend Aristocrats have lowered their standards for eligibility.

Later in the article, I'll reveal the new Aristocrats and talk about whether they really deserve to be part of this elite group. But first, let's look at why investors follow the Dividend Aristocrats in the first place.

Most dividend investors judge stocks based on their dividend yields. The idea behind focusing on yield is simple: For many investors, when it comes to payouts, more is better.

But high-yielding stocks don't have a great track record of remaining high-yielding stocks. All too often, what drives a dividend yield up isn't strength in the payout but rather weakness in the share price, which often precedes dividend cuts that sabotage the expectations of shareholders.

By contrast, Dividend Aristocrats don't focus on yield at all. Rather, all the companies on the old list became eligible to be a Dividend Aristocrat when they had increased their annual dividend payout for 25 consecutive years.

The value of measuring streaks of dividend increases is in showing a company's ability to get through good times and bad while still treating their shareholders right. It's easy to raise dividends during good times, but being able to sustain and grow dividend payouts even during recessions and other turbulent market environments demonstrates how strong a dividend stock is.

Now, though, some of the luster of being a Dividend Aristocrat is disappearing. As Barron's reported yesterday, S&P Dow Jones Indices, which manages the list, decided to require only 20 consecutive years of dividend increases rather than 25. As a result, the broad list of Aristocrats drawn from the S&P 1500 Composite index of large, mid, and small caps will now include 14 new stocks, including four that are members of the (INDEX: ^GSPC) . Let's take a closer look at these four.

Among the new Aristocrats, one definitely has the seal of old-Aristocrat approval. Chevron (NYS: CVX) reached the 25-year mark when it increased its payout earlier this year, so it was destined to join the group regardless.

(NYS: CAH) has turned wholesale drug distribution into a huge business. Even as the health care world has changed dramatically, Cardinal has found ways to keep costs low and offer attractive services to its health-care-provider clients.

With 21 years of dividend increases, General Dynamics (NYS: GD) meets the definition of a stock able to ride the highs and lows of its industry. Even in the face of defense budget cuts that have the entire sector worried, General Dynamics raised its dividend by 8.5% earlier this year.

Perhaps the most controversial addition is Avon Products (NYS: AVP) . Although the company has 22 years of consecutive payouts, it chose not to increase its dividend during the first quarter of 2012, which is traditionally the time of year it has raised its payout in past years. With the company having turned down Coty's buyout bid, facing a debt-to-equity ratio of more than 200%, and having lost more than 40% of its share price in the past year, Avon's tenure as a Dividend Aristocrat could be short-lived.

Making it easier to qualify as a Dividend Aristocrat definitely takes a little of the shine away from being part of the prestigious list. But all in all, stocks that qualify have still demonstrated their commitment to dividend growth, and for many investors, that's the real key.

To get more ideas of stocks that pay strong dividends, let me suggest that you read our special report, "Secure Your Future With 9 Rock-Solid Dividend Stocks." As the name implies, we're going to give you access to some of the best dividend companies in the world, and best of all, this report is completely free, so don't miss out!

Tune in every Monday and Wednesday for Dan's columns on retirement, investing, and personal finance. You can follow him on Twitter@DanCaplinger.

At the time thisarticle was published Fool contributor Dan Caplinger is a payout fanatic. He doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of General Dynamics. Motley Fool newsletter services have recommended buying shares of Chevron. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy can deal with parallel and uneven bars.

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