What it means
A dividend is a share of a company's profit paid to shareholders. Most companies can pay a dividend in a good year, but raising it year after year through recessions and downturns takes strong cash flow and a disciplined board.
A 25-year record therefore says something about the quality and resilience of the business. To be included, a company must be a member of the S&P 500 and must meet minimum standards for size and trading liquidity.
It must also have increased, not just maintained, its dividend in each of the last 25 years. A company that cuts or freezes its dividend even once drops out of the index.
The index is equal-weighted, with limits on how much any one sector can represent. That means a small member counts as much as a large one at each rebalancing, which differs from the S&P 500, where the largest companies dominate.
The result is a more even spread across consumer goods, industrials, healthcare and other steady sectors. The strategy has pros and cons for a business or investor.
Stable dividend growth supports reliable income, and these companies often hold up better in downturns than the market as a whole. They can, however, lag in strong rallies led by fast-growing companies that pay little or no dividend.
Dividend growth is not a guarantee of good investment returns, either. A company can raise its dividend while its business weakens, and a high payout can leave less money for reinvestment, so investors should check cash flow and payout ratios as well.
The index also has a practical effect on company behaviour. Boards of companies with long records are reluctant to break the chain, which can encourage careful cash management but can also lead to small increases that exist mainly to keep the record alive.
Investors should look at the size of each increase and the cash flow behind it, not just the count of years.
In practice
Real-world examples.
Example
A retired investor wants steady rising income and buys a fund that tracks the S&P Dividend Aristocrats. Each year the fund's dividend payments tend to rise, helping her income keep up with inflation, although she knows that there is no promise the rises will continue.
Example
A corporate treasurer compares her company's 8-year dividend record with the 25-year requirement. She sees that building such a record would need steady cash generation and a board that is willing to commit to regular increases.
Example
A financial adviser shows a client how a $100,000 investment in a dividend-growth fund might produce $3,000 of income in year one at a 3% yield, and more in later years as dividends rise. If dividends grow 5% a year, the income would reach about $3,150 in year two.
Formula
Calculation
Dividend yield = Annual dividend per share / Share price x 100.
Suppose a company pays an annual dividend of $2.40 per share and its shares trade at $80. The yield is $2.40 / $80 = 0.03, or 3%. If the company raises the dividend by 5% next year to $2.52 ($2.40 x 1.05) and the price is unchanged, the yield rises to $2.52 / $80 = 3.15%. Dividend growth compounds. A dividend of $2.40 growing at 5% a year becomes about $3.06 after five years, since $2.40 x 1.05 x 1.05 x 1.05 x 1.05 x 1.05 is roughly $3.06.Case study
Seen in the real world.
Maplewood Household Products is an entirely fictional consumer goods company with a 24-year record of dividend increases. In this illustrative story, the board faces a tough year in which profit falls 15% and a large acquisition requires cash.
Some directors suggest freezing the dividend for a year, but the chief financial officer points out that the company is one increase away from the 25-year mark. She shows that a 2% increase costs only $6,000,000, which the company can afford from cash flow.
The board approves a small increase and the company joins the list of long-record dividend payers. The illustrative lesson is that dividend records influence behaviour, and a record can encourage discipline, but it should never come at the expense of the company's financial health. The chief financial officer later told staff that the long record had become part of the company's identity, and that clear rules on cash and borrowing made each year's decision easier.
Watch out
Common mistakes.
- Assuming a high dividend yield is the same as a long dividend growth record.
- Believing a long record guarantees future increases, when a business can change.
- Ignoring the payout ratio, which shows whether the dividend is affordable from earnings.
Questions
People also ask.
How many years of increases are needed?
At least 25 consecutive years of dividend increases.
Is the index weighted by company size?
No, it is equal-weighted, with limits on how much any single sector can represent.
Do all members pay high yields?
No, some pay modest yields but have increased them consistently for many years.
From the founder's library
Take it further with the book.
Build your financial confidence beyond this definition. Shihan's full-length guide, Accounting Fundamentals, takes the same plain-English approach and turns it into a complete, practical playbook for non-finance managers, business owners and students - with chapter-end quiz answers and presentation slides included.
25% off with code MMHQ25, applied at checkout. Priced in USD - checkout may show the equivalent in your local currency.
View the book and save 25%