What makes Dividend Aristocrats a great investment for you?

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Occasionally you might read on the S&P500 Dividend Aristocrats; these companies are members of the S&P 500 Index that have paid and received a dividend for at least 25 consecutive years.

Those looking for total returns might scoff at dividend-paying stocks as mature companies that have left their best growth days in the rearview mirror. But consider that the Dividend Aristocrats have collectively outperformed the S&P 500 index by an average of 0.74% per year, which creates significant margin over the decades.

What’s the secret to their success and what can it mean for your wallet? Here’s why every investor should at least consider adding a few aristocrats to their long-term investing strategy.

The anatomy of a dividend

Most investors know what a dividend is: companies that have cash sometimes share it with their shareholders. But many investors are unaware of the anatomy of a dividend and how it impacts a business.

For example, a dividend is a cash expense. Accounting rules can distort much of the financial jargon and metrics you see in a company’s financial statements. A company like netflix may show a net profit but simultaneously generate little free cash flow, because accounting rules can affect how companies report profits.

NFLX Net Income (TTM). Data by YCharts. TTM = last 12 months.

A corporation can only pay a dividend in cash; he can borrow money to pay a dividend, but it’s a losing game that never lasts long. A company that can not only pay you a portion of its profits in cash, but also continue to increase its annual payment can only do so if it grows for the long term; you can’t pretend.

Successful investing can be as simple as buying quality businesses and letting them work their magic over time. A Dividend Aristocrat often fits this bill simply because of what paying and collecting a cash expense like a dividend entails.

An additional level of composition

A steadily growing business will generate capital gains as income increases over time, but what you can do with dividends propels aristocrats as investments. Dividends are essential to investment returns; they accounted for 31% of total S&P 500 returns from 1926 to 2021.

You can also reinvest the dividends, taking the money and buying more shares. These new shares will cost you nothing beyond your initial investment and will pay their own dividends, creating a cumulative effect.

PG Chart

PG data by YCharts.

This can have a significant impact on the total return of your investments over time. Consider an action like Procter & Gamble, a dividend king with 66 consecutive years of dividend increases. Since the early 1970s, investors have earned 4,720% lifetime returns through capital appreciation. This is very good, but it would have almost tripled to 12,120% by reinvesting the dividends to take advantage of the capitalization!

You don’t need circuits to win the match

In the end, you don’t need to find the next one Amazon to have a lucrative investment trip. Derek Jeter is one of baseball’s greatest players because he could consistently hit the ball year after year, even though it didn’t come out of the park often.

The same goes for investing: a dividend aristocrat probably won’t make you rich overnight, but you can get rich by buying and owning aristocrats as part of a diversified portfolio with a long-term outlook. term.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a board member of The Motley Fool. Justin Pope has no position in any of the stocks mentioned. The Motley Fool holds positions and recommends Amazon and Netflix. The Motley Fool has a disclosure policy.

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