How to Invest in Dividend Aristocrats and Dividend Kings Via ETFs

When it comes to dividend investing, there are typically three paths an investor might consider: focusing on high dividend yields, prioritizing dividend quality (often reflected through metrics like return on equity and payout ratio) or emphasizing dividend growth.

The latter option can be one of the simplest yet most effective strategies for dividend investors. You can evaluate this through the rate at which a company has grown its dividends or, more straightforwardly, by looking at the number of consecutive years they have increased their dividends.

While it’s not a definitive metric, the consistency of dividend increases serves as a robust initial filter to identify financially stable and potentially high-quality companies. It helps investors weed out those that are unprofitable or maintain poor business models.

Like many investment metrics, the concept of dividend growth has been widely incorporated into the methodologies of numerous dividend-focused ETFs. This approach culminates in the categories of Dividend Aristocrats and Dividend Kings.

Both groups consist of stocks distinguished by their long histories of annual dividend increases—Aristocrats have raised dividends for at least 25 consecutive years, while Kings have done so for at least 50 years. Here’s a closer look at what these stocks represent and two ETFs that specifically target them,

What are Dividend aristocrats?

The most popular benchmark for Dividend Aristocrats is the S&P 500 Dividend Aristocrats Index, which includes stocks from the S&P 500 that have increased their dividends for at least 25 consecutive years.

However, this isn’t the sole criterion for inclusion. Each stock must also have a float-adjusted market capitalization of at least $3 billion and an average daily trading volume of $5 million over the three months prior to their inclusion.

There are additional constraints to ensure diversification within the index. For instance, the index must contain a minimum of 40 stocks. If fewer than 40 stocks meet the criteria, the requirements are relaxed to accommodate more stocks.

Additionally, no single GICS sector can make up more than 30% of the index. Stocks within the index are equally weighted, which tends to result in a higher allocation towards mid-cap companies compared to other indices that might weight by market cap.

Investing in Dividend aristocrats ETFs

One of the most prominent ETFs that tracks this index is the ProShares S&P 500 Dividend Aristocrats ETF NOBL-0.06% . Notably distinct from ProShares’ leveraged and inverse ETFs, NOBL follows the aforementioned index for a 0.35% expense ratio. Currently, it holds 67 stocks and pays a 1.99% 30-day SEC yield.

A closer look at NOBL’s portfolio reveals an interesting composition, predominantly featuring traditional consumer staples and industrial sector stocks. This includes well-known companies like Coca-Cola (NYSE:KO), Pepsi, Walmart (NYSE:WMT), Target (NYSE:TGT), 3M (NYSE:MMM), Illinois Tool Works (NYSE:ITW), Caterpillar (NYSE:CAT), General Dynamics (NYSE:GD), and Colgate-Palmolive (NYSE:CL).

What are Dividend kings?

The concept of dividend growth reaches its zenith with the S&P Dividend Monarchs Index, which focuses on “Dividend Kings,” companies that have achieved at least 50 consecutive years of dividend increases.

“This elite group of companies have rewarded shareholders with rising dividends for over half a century, exemplifying their financial strength and resilient business models,” says Dave Mazza, CEO at Roundhill Investments. “They have successfully weathered economic challenges, market pullbacks, wars, and various other market shocks, all whilst continuing to deliver for shareholders."

Unlike the Aristocrats, the Dividend Monarchs Index also pulls from a broader array of stocks via the S&P 1500 Composite Index, allowing for the inclusion of more small-cap stocks particularly in the real estate and utilities sectors that are under-represented in the S&P 500.

As of April 22, 2024, the index comprises just 40 constituents, though it maintains a minimum requirement of 25 stocks to ensure sufficient breadth. Similar to the Aristocrats, the Monarchs also adhere to minimums on market cap and liquidity.

A key distinction of the S&P Dividend Monarchs Index is its dividend yield-weighted approach, which emphasizes stocks with higher indicated annual dividend yields, contrasting with the equal weighting strategy of the Aristocrats index.

Additionally, to maintain diversification, no single stock can exceed a 5% weighting. The index undergoes an annual reconstitution and quarterly rebalancing to adjust for any changes in the dividend landscape.

Investing in Divided kings ETFs

Currently, the Roundhill Dividend Monarchs ETF KNGS is the first and only U.S. ETF specifically tracking the S&P Dividend Monarchs Index. Sporting a 0.35% expense ratio, KNGS matches the cost of investing in NOBL and shares 26 holdings with it.

“KNGS is the first and only U.S.-listed ETF to offer investors the opportunity to tap into this elite group of companies, providing both the potential for robust yield and the premium quality associated with enduring blue-chip names,” Mazza says.

This content was originally published by our partners at ETF Central.