For many investors, the Dividend Aristocrats list is a staple. The long history of paying dividends and outperforming the S&P 500 makes these stocks a go-to when looking for investing opportunities.

Last year was not only a difficult year for many around the world, but it was also a difficult year for income investors. That difficulty spilled over into the companies that had to suspend paying dividends. However, the need for income is only increasing as bond yields remain near historic lows.

Let’s look at what makes a Dividend Aristocrat and the changes from 2020 to 2021.

Dividend Aristocrats Requirement

The requirements to be considered a Dividend Aristocrat are pretty basic but very difficult to achieve. The requirements are:

• S&P 500 stock
• Paid dividend for 25 consecutive years or more
• Increased dividend for 25 consecutive years or more
• Meet minimum size and liquidity requirements

As you can see, a company can’t just become part of this elite class of stocks. They have to have had a long history of commitment to paying and raising their dividend. The list of companies that meet these requirements change every year, but there is current 65 names that make up this list at the start of 2021.

Dividend Aristocrat 2021 Changes

In 2020, there was a number of additions to the list. Some of these companies were newly added because they met the criteria while others were added because of spin-offs and mergers. For example, Otis Worldwide Corp (NYSE: OTIS) and Carrier Global Corp (NYSE: CARR) were spun off by United Technologies. United Technologies then merged with Raytheon to form Raytheon Technologies Corp (NYSE: RTX).

The biggest surprise to the index in 2020 was the suspension of their dividend by Ross Stores, Inc (Nasdaq: ROST). The company ended up having to close all of their stores and furlough all of their employees at the outset of COVID-19 lock-down policies. While the move was surprising, it was probably responsible given the uncertainty at the time.

For 2021, it’s pretty quiet so far. The shake-up occurred early in 2020 and the index will likely be updated towards the end of the month by Dow Jones.

Click here for the shareable link to import the list to think or swim from TD Ameritrade.

How to Use the Dividend Aristocrat List

The Dividend Aristocrat list is a good starting point in your analysis. It gives a select set of companies that may be your dividend universe. However, not all of them are good investments. Here are three areas to examine:

1. Dividend yield
2. Valuation
3. Historical correction

Dividend Yield

Since the Dividend Aristocrat stocks are income investments, there need to be some minimum standards. The first is that the yield should exceed the S&P 500 at as minimum. That means a dividend yield that is less than 2% is really low. Right now, a 3% yield is a very reasonable starting point.

The second consideration is comparing the current yield against its history. Many sites will show a 5-year average yield. At a minimum, the yield should be higher than its 5-year average.

Valuation

 The long-term performance of an investment is directly correlated to valuation when purchased. Buying a dividend stock at a multi-year high is a recipe for under-performance. Considering things like P/E EV/EBITDA, P/S or P/B valuation ratios can help guide you. Seeing an EV/EBITDA less than 10 is a good indicator, but also seeing that the current ratio values are less than the 5-year average is also a good starting point.

Historical Correction

If you’re buying a Dividend Aristocrat stock for the income or yield, typically it’s best to buy when the yield is high. This makes intuitive sense if you were buying a CD at a bank or a bond, but many investors miss this principle when it comes to stocks.

Looking at the current dividend yield and valuation ratios will help a lot with buying the dips but seeing that the stock has a historically large correction is another layer to consider. For example, in a bigger pull-back, how much of the advance has corrected? A 50% to 61.8% retracement of the long-term bull market trend is a good starting point for this criterion.

Conclusion

 As you look forward to 2021, consider making the Dividend Aristocrat watch list something that you monitor regularly. The opportunities for generating income for the long-term, or even trading the larger dips can provide real opportunity for profits in 2021 and beyond.