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Finding the Next Dividend Aristocrat

Dividend aristocrats are companies that have been consistently growing their dividends for 25 consecutive years. This is no mean feat, with only 51 companies in the S&P 500 index enjoying such a status. If you are one of those investors looking to unearth the next dividend aristocrat, here are three things to seek out.

A low dividend payout ratio

The dividend payout ratio is the ratio of profit paid out to shareholders as dividends. It can be calculated by simply dividing dividend per share by earnings per share.

A low dividend payout ratio means that the company has room to grow its dividends in the future by increasing the payout ratio. Furthermore, if profit drops in the future, the company still has leeway to continue paying out the same dividend.

Another important reason to look for companies with low dividend payout ratio is that these companies can grow their businesses over time. A growing company would want to keep a larger percentage of its profit to reinvest in its business. On the contrary, a company that has a high payout ratio probably has difficulty putting the money to good use and is hence, paying it out fat dividends.

History of earnings per share growth

Usually, a decent indicator of a company’s future prospects is its past history. A company that has been growing in recent times is more likely to grow in the future as well.

Looking out for companies that can grow its income in the future should be critical for dividend seekers. This is because businesses that generate more income can pay out more to investors in dividends.

Having said that, not all companies with earnings per share growth in the past can continue their run. Investors need to look out for companies that have sustainable earnings growth and a good economic moat that can withstand other business pressures.

A timeless product or product diversity

Achieving dividend aristocrat status is difficult for any company because 25 years is a long time to continuously grow its dividends. Investors should hence focus on long-term business prospects.

To do this, we need to ask ourselves if the company’s product will continue to be relevant in 25 years’ time. A company with a history of reinventing and progressing with the times is also a good sign. Even better would be a company that has a wide range of products and services, spanning multiple industries. This diversity can keep it relevant even if one product line or service falters.

The Foolish bottom line

Investing in companies that can continuously grow its dividend can be hugely rewarding for investors. This is especially so for investors who wish to reinvest their dividends due to the compounding nature of investing. Hopefully, looking out for these three characteristics in a company can help us find the next dividend aristocrat to invest in.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Jeremy Chia doesn't own shares in any companies mentioned.