The investment thesis behind the S&P 500 Dividend Aristocrats -- an index composed of large-cap S&P 500 companies that have increased dividends for 25 consecutive years -- is simple and effective: Increased dividend payouts will compound over time. For example, a $1,000 investment in a stock yielding 4% -- growing dividend payout 7% annually -- will yield approximately 8% on the original $1,000, 10 years later (assuming no capital appreciation). This concept is known as "yield-on-cost."
A cautious investor should use the Dividend Aristocrats index only as a starting point for dividend stock ideas -- paying careful attention to the financial condition and prospects of each company. In the past, we have suggested that income investors periodically subject their portfolio to a "Dividend Acid Test*" -- a pass/fail exam that indicates if a company's dividend payout is covered, in full, by the company's liability adjusted cash flow yield (LACFY).
Source: TheStreet.com
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