You Should Get to Know These Stock Market Royals

Dollar king

America may have thrown off a king as head of state hundreds of years ago, yet royalty continues to not only survive but thrive on our stock exchanges. A small, very select group of companies known as the Dividend Aristocrats have pumped out comparatively rich gains for decades. Here's a primer on this rarefied club.

From Stock Exchange to Palace

Unlike the traditional nobility, a stock can find its way into Dividend Aristocrat status if it works hard enough -- and pays its dues.

%VIRTUAL-WSSCourseInline-975%To enter the club, a company must pay a dividend and raise that distribution at least once per year for a minimum of 25 years in a row.

That's a tall order. To pay a dividend, a company typically has to be profitable, or at least bring in enough cash that it can spare for a shareholder payout. That's challenging enough to do for a year or several consecutively; it's immensely difficult to not only achieve this for a quarter-century, but also increase that payout at least annually.

Many of most celebrated names in American business haven't managed to achieve this. Apple (AAPL), to name one, only relaunched its dividend in 2012, after a nearly 20-year hiatus. This, even though it recently achieved the highest quarterly net profit of any publicly traded company in history.

A Most Exclusive List

Out of the thousands of stocks listed across the various exchanges in this country, barely over 100 qualify as Dividend Aristocrats. They're a mixed bunch. They range from the world-famous -- Coca-Cola (KO) and its eternal rival PepsiCo (PEP), Walmart (WMT) -- to the obscure -- Old Republic International (ORI), anyone? How about Community Trust Bancorp (CTBI)?

Numerous Aristocrats have been increasing their dividends for longer than many of us have been alive. Diebold (DBD) has spent the longest time on the list, having increased its dividend for a hard-to-believe 61 years. Post-it Notes maker 3M (MMM) isn't too far behind, at 56.

Some Are More Equal Than Others

A stock that habitually raises its dividend for years is typically going to boast a higher return (share price appreciation plus dividends) than one that isn't as generous.

At the moment, 53 Aristocrats are part of the benchmark S&P 500 index. On their own, the 53 have posted a return north of 10 percent over the last 10 years. That's well above the broader S&P 500, which has rung up a gain of less than 8 percent.

Even with the dividends stripped out, the Aristocrats beat the S&P 500 on stock price appreciation alone, garnering gains of over 7 percent versus a bit more than 5 percent across those same 10 years.
But investors need to be aware that, just like the upper nobility in the olden days, not all aristocrats are created equal.

%VIRTUAL-pullquote-Some are quite generous with their payouts, but there are numerous misers. %Some are quite generous with their payouts: AT&T (T), for example, has a dividend yield (annualized payout divided by current share price) well in excess of 5 percent, as does specialist real estate investment trust HCP (HCP). These are far above the average dividend yield of the S&P 500, which is currently 1.9 percent.

But there are numerous misers on the list. Hormel Foods (HRL) is the purveyor of famous (or infamous, depending on your point of view) food products such as Spam and Skippy peanut butter. But its current 25-cent quarterly disbursement per share only yields 1.8 percent.

Americans love getting drunk on Jack Daniel's whiskey, but the brand's corporate owner Brown-Forman (BF-B) pays a dividend that isn't so intoxicating. Its nearly 32-cent-per-share quarterly distribution pours out to a mere 1.4 percent.

And membership in the aristocracy doesn't automatically ensure strong fundamental performance. McDonald's (MCD), for example, has recently been struggling with declining sales and profitability, as well as adjusting to a leadership change after its CEO exited less than three years into his tenure.

Do Some Due Diligence

No group of stocks, even those with good pedigrees and strong bloodlines, is composed entirely of guaranteed winners. Investors should always do their research on companies they're considering, making sure that the selected candidates meet their highest standards. Dividend Aristocrat status alone isn't sufficient justification for buying a stock.

But with its long history of putting money in shareholders' pockets, this noble group is certainly a fine place to start looking for solid investments. More than a few of them have produced, and should continue to produce, er, royal returns for their investors.

Motley Fool contributor Eric Volkman has no position in any stocks mentioned. The Motley Fool recommends 3M, Apple, Coca-Cola, McDonald's and PepsiCo. The Motley Fool owns shares of Apple and PepsiCo and has the following options: long January 2016 $37 calls on Coca-Cola and short January 2016 $37 puts on Coca-Cola. Try any of our Foolish newsletter services free for 30 days. To read about our favorite high-yielding dividend stocks for any investor, check out our free report.​