How the Newest Dividend Aristocrats Did in 2012


Dividend stocks are in vogue like never before, thanks to the income that they provide in a low-rate environment that has made traditional income investments like bank CDs and Treasury bonds nearly useless for those who need portfolio income to make ends meet. Among dividend stocks, only the cream of the crop qualify for inclusion in the prestigious Dividend Aristocrats list, which is reserved for those companies that consistently raise their dividend payouts every year for decades.

Earlier this year, the managers who run the Dividend Aristocrats decided to loosen their standards for entry onto the prestigious list. When S&P Dow Jones Indexes decided to lower its consecutive annual increase requirement from 25 years to 20 years, it allowed several stocks onto the list well before they otherwise would have. Later in this article, we'll take a closer look at how some of those stocks did, but first, let's give some background on the Aristocrats and why they're so popular among dividend investors.

The value of consistency
At first glance, raising dividends for 20 straight years may not seem like such a difficult feat. After all, some of the companies on the Aristocrats list manage to put together long runs of consecutive increases by making tiny boosts to their annual payouts every year, with raises of a single penny or even a fraction of a penny not being unheard of.

Still, when you look at most of the members of the Aristocrats, you'll see much more than token increases. Moreover, when you think about the crises that businesses have had to face over the past 20 years -- everything from the tech bust from 2000 to 2002 to the financial crisis of 2008 and 2009 -- just the ability to maintain dividend payouts was a big challenge. Especially four years ago, when access to credit markets basically disappeared and companies were starved for cash, many big blue chip stocks weren't able to sustain dividends. That episode thinned out the ranks of the Aristocrats considerably and likely contributed to the decision to reduce their standards a bit.

How'd the newcomers do?
Among the stocks that became eligible at mid-year, four were members of the S&P. Overall, they've put in a mixed performance since joining the ranks of the Aristocrats.

For Chevron , becoming an Aristocrat was a foregone conclusion regardless of the shift, as the company finally reached its 25th year in its dividend-increase streak. Since mid-July, the stock has risen about 6%, but the company has faced declining production in many of its oil and gas plays, and low prices for oil and natural gas haven't helped Chevron's top line. Combined with tensions overseas due to spills in Brazil and a fight over environmental damage in Ecuador, Chevron has made investors nervous, despite its successes in finding new opportunities around the world.

Cardinal Health has had its stock go nowhere in the past five months or so. During the summer, Cardinal took a big hit on the heels of concerns about negative guidance it gave during its fiscal fourth-quarter earnings report. Yet since then, the survival of new health-care reform gives the drug distributor a greater chance of getting to raise its profit margins, as generic drugs should become more popular as the Affordable Care Act stresses cost savings whenever possible.

The 10%-plus gain for General Dynamics comes as a big surprise given the uncertainty in the defense industry over possible budget cuts and the impact of sequestration if Congress can't pass legislation substituting other spending cuts. With the failure of the planned merger of Europe's BAE Systems and EADS, however, speculation that General Dynamics could pick up strategic assets from BAE helped boost the stock.

Finally, one new Aristocrat completely disappointed dividend investors: Avon Products . The company slashed its dividend this fall, as its profits simply weren't enough to sustain its big payout. With profit margins falling, its sales force dwindling, and massive amounts of debt, Avon had no choice but to give up its Aristocrat status, and shares fell 6% since July -- making investors wish that the company had accepted earlier buyout bids from Coty.

No sure thing
These results should remind you that as valuable as reliable dividend stocks can be, you can't completely bank on them producing strong returns over short periods of time. Moreover, even the longest streaks of dividend payments can end at any moment. Only by staying vigilant with your portfolio will you minimize the chances that unexpected news will completely blindside you.

None of the newest Dividend Aristocrats really soared in 2012, but what will next year hold? We think we've found in a winner from The Motley Fool's chief investment officer, who recently selected his No. 1 stock for the next year. Find out which stock it is in our brand-new free report: "The Motley Fool's Top Stock for 2013." I invite you to take a copy, free for a limited time. Just click here to access the report and find out the name of this under-the-radar company.

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Fool contributor Dan Caplinger has no positions in the stocks mentioned above. You can follow him on Twitter @DanCaplinger. The Motley Fool owns shares of General Dynamics. Motley Fool newsletter services recommend 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 Motley Fool has a disclosure policy.

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