What are Dividend Aristocrats?

The term 'dividend aristocrats' is used to describe Standard & Poor's (S&P) 500® Index companies that have increased their dividend payouts each and every year for at least 25 consecutive years.

How Do Dividend Aristocrats Work?

Typically, a dividend aristocrat is a large and relatively stable blue-chip company with a healthy balance sheet. Companies on the list are often household names with storied pasts and ubiquitous brands, such as McDonald's (NYSE: MCD) and Coca-Cola (NYSE: KO).

S&P has several indexes for dividend aristocrats, including:

S&P 500 Dividend Aristocrats -- this index measures the performance of large cap, blue chip companies within the S&P 500 that have consistently improved their dividend rates every year for at least 25 consecutive years.

S&P 500 Dividend Aristocrats Risk Control Indices -- By utilizing an overlying mathematical algorithm and methodology, these indices offer greater stability and control of the S&P 500 Dividend Aristocrats Index's risk level.

S&P 500 Europe 350 Dividend Aristocrats -- this index measures the performance of S&P 350 index constituents that have consistently improved their dividend rates every year for at least 10 consecutive years. These companies must also have a float adjusted market capitalization of at least U.S. $3 billion and an average daily trading volume of at least U.S. $5 million.

S&P 500 High Yield Dividend Aristocrats -- this index measures the performance of the 60 highest dividend yielding S&P Composite 1500 companies that have consistently increased dividends every year for at least 25 years.

S&P 500 Pan Asia Dividend Aristocrats -- this index measures the performance of companies within the S&P Pan Asia Broad Market Index (BMI) that have consistently increased dividends every year for at least seven years.

S&P 500/TSX Canadian Dividend Aristocrats -- this index measures the performance of S&P Canadian Broad Market Index (BMI) that have consistently increased dividends every year for at least five years.

Investors can track the performance of the dividend aristocrats online, via the S&P website.

Why Do Dividend Aristocrats Matter?

A dividend aristocrat is considered the 'gold standard' for dividend-generating stocks. Income investors seeking safety and a steady stream of income gravitate toward the dividend aristocrats. However, it's important to note that extreme events can cause even the aristocrats to fall out of favor and off the list, so following a dividend aristocrat investing strategy is not fool-proof.

For example, during the Great Recession of 2008-09, many financial institutions once considered to be rock-solid dividend plays were dumped from the list. If a company fails to increase its dividends from the previous year, it is removed. This is what happened during the recent economic downturn and financial meltdown, when brand-name companies ordinarily associated with dividend stability were cut, notably Bank of America.