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The London Stock Exchange is home to hundreds of dividend stocks. Many of these income-generating businesses can be found in countless income portfolios, with one particular group earning extreme popularity – Dividend Aristocrats.
The Aristocrats are the companies that have consistently hiked shareholder payouts each and every year for decades. And with management teams eager to retain this title, these investments are often considered some of the ‘safest’ in the world of stocks when hunting down passive income.
5 top Aristocrats in the FTSE 100
Right now, there are currently 11 Aristocrat stocks within the UK’s flagship index. But let’s zoom into just the top five with the longest dividend-hiking streaks.
| Company | Industry | 5-Year Dividend Growth | 10-Year Dividend Growth |
| DCC | Industrial Support Services | 7.3% | 9.9% |
| Diageo | Beverages | 3.4% | 2.5% |
| Halma | Electronics | 6.6% | 6.8% |
| Scottish Mortgage Investment Trust | Investment Services | 6.3% | 3.9% |
| British American Tobacco | Tabaco | 3.0% | 4.8% |
Encouragingly, each one operates within vastly different industries. And it’s a similar story when zooming out to the other six Aristocrats within the FTSE 100. So it should come as no surprise that a popular investing strategy is to build an income portfolio exclusively of these types of dividend stocks.
But is this actually a winning strategy? Investing in dividend-growth stocks can generate significant long-term returns. After all, to maintain constant dividend growth, these businesses need constant cash flow expansion driven by higher sales and margins. Needless to say, these are also what drive up stock prices, sometimes resulting in jaw-dropping returns.
Unfortunately, that doesn’t tend to happen for businesses that have already reached Aristocrat status. With most of the growth behind them, dividend increases are typically quite modest. And looking at these top five UK stocks, dividend growth is, on average, just slightly ahead of inflation.
For investors looking to protect their wealth, that might do nicely. But even in this situation, the ‘safest’ stocks aren’t remotely risk-free.
Every investment carries risk
Past performance is a poor indicator of future returns. And the same’s true for dividend hiking streaks. Investors in National Grid (LSE:NG.) learned this the hard way earlier this year.
Until recently, the energy infrastructure monopoly sat comfortably at the top of the UK’s Aristocrat list. Demand for electricity continues to rise thanks to the adoption of electric vehicles and the expansion of data centres. Plus, since energy never falls out of fashion, even in a recession, the firm’s cash flows have been fairly consistent, enabling it to hike dividends for decades.
However, management seemingly became too reliant on debt during the years of near-0% interest rates. Consequently, when the Bank of England suddenly hiked rates to combat inflation, the firm’s balance sheet became crippled. What followed was a radical restructuring of the business that included a £7bn rights issue to raise capital and the halving of dividends.
In other words, shareholders were massively diluted, and payouts got cut even after decades of being hiked – proof that the ‘safest’ dividend stocks aren’t always safe.