New investors often start their journey lured by the promise of dividend stocks, but there’s a common pitfall that many fall into: the allure of high yields.
It’s tempting to think that a high dividend yield is like hitting the jackpot, but seasoned investors know that an unusually high yield isn’t always what it seems. In some cases, it can be more akin to a warning sign than a stroke of luck.
However, a high yield often signals trouble within the company, such as deteriorating financials or challenging industry conditions, which could jeopardize future dividend payouts.
Instead of being swayed by high yields, I encourage new investors to look at dividend growth — specifically, companies that have a track record of consistently increasing their dividends over time.
This sustained growth can be a sign of a company’s health, profitability, and a commitment to returning value to shareholders. It suggests that the company is not just keeping up with inflation but is actually thriving.
Now, if this is a new territory for you, let me introduce you to the concept of dividend aristocrats. These are the elite companies that haven’t just paid dividends but have raised them year after year, for a significant number of years.
Keep reading to find out about my ETF pick targeting these dividend aristocrats.
What is a dividend aristocrat?
A dividend aristocrat isn’t just any company that pays dividends; it’s one that has a distinguished history of not only maintaining but also increasing its dividend payouts over a significant period of time.
However, the specific criteria for a company to earn this title can vary depending on where you’re looking.
In the United States, the term “dividend aristocrat” refers to a company that has increased its dividend for at least 25 consecutive years.
This quarter-century commitment to growing dividends is a hallmark of financial fortitude and has been a reliable indicator of a company’s stability and long-term investment potential.
It’s a stringent standard that only a select group of companies can meet, reflecting their ability to perform and reward shareholders through various economic conditions.
On the other hand, the Canadian market paints a different picture. With a smaller pool of companies to draw from, applying the same 25-year criterion as the U.S. would be too restrictive and leave out a number of worthy companies that have demonstrated consistent growth in dividends.
Therefore, in Canada, a company can be considered a dividend aristocrat if it has a track record of increasing its dividends for just five consecutive years.
This shorter timeframe takes into account the smaller size of the Canadian market and lesser number of companies but still highlights those that have a proven ability to increase their payouts to shareholders.
A dividend aristocrat ETF to consider
Investing in individual dividend aristocrat stocks can indeed be quite a task. If you were to manage a portfolio of roughly 20 such stocks on your own, you’d need to keep track of each company’s dividend announcements, reinvest those dividends, and constantly check if they still meet the criteria of a dividend aristocrat. This process can be exhausting and time-consuming for any investor.
That’s where the convenience of an ETF comes in. An ETF can provide you with a diversified portfolio of dividend aristocrats, all while sparing you the heavy lifting of portfolio management. My choice for this kind of investing is iShares S&P/TSX Canadian Dividend Aristocrats Index ETF (TSX: CDZ).
CDZ currently holds around 90 Canadian stocks. Each of these stocks has not just paid dividends but has also increased them for at least five consecutive years, meeting the Canadian criteria for being considered dividend aristocrats.
By investing in CDZ, you get the benefit of a ready-made and diversified portfolio of reliable dividend-growing companies, without the hassle of doing all the management yourself. Oh, and you also get monthly dividend payments, too!
