Beat the ‘4% Rule’ with These Dividend Aristocrats

dividend-aristocratsFor retirement planning, a 4% withdrawal rate is often used in calculating how much to spend annually so that one does not run out of money.  There are many ways to plan so that enough funds are available to finance the 4% yearly withdrawal from retirement accounts.  An attractive way is to invest in “Dividend Aristocrats” such as AT&T (NYSE: T), Chevron (NYSE: CVX), Consolidated Edison (NYSE: ED), and HCP Inc. (NYSE: HCP) that have a dividend yield of over 4%.

The S&P 500 Dividend Aristocrats list comprises stocks that have increased the amount of their dividend annually for at least the past 25 years.

The act of paying a dividend is a show of strength for a business entity.  To send out a dividend check every quarter for over a quarter of a century is even more impressive.  Increasing the amount of the dividend annually provides a great deal of reassurance to an investor that the income component of a stock is very solid.  For a retiree, it provides a divided yield that is higher than 4%, with the amount being increased on a yearly basis.

When the dividend yield is over 4%, that makes the Dividend Aristocrat very appealing in a period in the stock market when the average dividend for a member of the S&P 500 index is under 2%.

As the chart below shows, neither AT&T, Chevron, Consolidated Edison nor HCP will be mistaken for a growth stock in the years ahead, based on the consensus of the analyst community from Finviz.com. But each is a major player in its field: AT&T is a communications giant, Chevron is “Big Oil” in every meaning of the word, Consolidated Edison provides electricity to New York City, and HCP is a real estate investment trust (REIT) in the nursing home sector.  That market position is what results in the ability to not only pay a superior dividend yield, but to increase the amount annually.

Dividend Yield Dividend Growth Rate Institutional Investor Ownership Earnings per Share Growth Rate last 5 Years Earnings per Share Growth Rate projected for next 5 Years
AT&T 5.42% 2.17% 54.30% -10.30% 4.48%
Chevron 4.10% 9.66% 63.70% 14.10% -3.27%
Consolidated Edison 4.25% 1.26% 53.70% 3.40% 2.48%
HCP 5.72% 3.59% 88.30% 51.90% 3.28%
Source: Finviz

Growth is also not the most important goal in investing for retirement.

It is a stable, secure stream of income. That is certainly provided by Dividend Aristocrats. Even better is that the income component has a history of growing. Nothing is guaranteed, but the income from a Dividend Aristocrat is pretty much as close as it gets in investing. A robust dividend yield with a history of the amount being increased attracts long-term investors, many institutions such as mutual funds, and pension groups.  Those are very desirable, so the company leadership will do everything it can to protect the dividend yield increases to keep and attract these type of shareholders.

Over the last 25 years, there has been the Great Recession, wars, terrorist attacks, oil shocks, financial crises and the impeachment of an American president.

Despite this turmoil, AT&T, Chevron, Consolidated Edison and HCP Inc not only paid a dividend to shareholders, but increased the amount on a yearly basis. With a history like that, it is difficult to not imagine the increases not continuing for the future.  For retirement planning that is the foundation individual investors need so that adequate finances are there to meet all expenses after withdrawing 4% each year.

Jonathan Yates does not have a position in any of the stocks mentioned in this article.

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