Dividends are the holy grail of passive income investing. But not all dividends are created equal. A 10% yield might look amazing — until the company cuts the dividend and the stock crashes 40%.
The Formula
Dividend Yield = Annual Dividends Per Share / Stock Price × 100
Example: Johnson & Johnson pays $4.76/share annually. At a stock price of $160, its yield = 4.76 / 160 × 100 = 2.97%.
The Dividend Aristocrats
"Dividend Aristocrats" are S&P 500 companies that have increased their dividend for 25+ consecutive years. They are the gold standard:
| Company | Consecutive Increases | Current Yield |
|---|---|---|
| Coca-Cola (KO) | 62 years | 3.0% |
| Procter & Gamble (PG) | 68 years | 2.4% |
| Johnson & Johnson (JNJ) | 62 years | 2.9% |
| 3M (MMM) | 65 years | 5.5% |
| Walmart (WMT) | 51 years | 1.3% |
Red Flags: When High Yield = Danger
A high yield often means the stock price has fallen dramatically. Check these warning signs:
- Payout Ratio > 80%: The company is distributing most of its earnings, leaving no room for reinvestment.
- Declining Revenue: If sales are shrinking, the dividend is funded by debt — unsustainable.
- Negative Free Cash Flow: The company literally doesn't generate enough cash to pay dividends.
The Power of DRIP (Dividend Reinvestment)
If you reinvest dividends back into shares, the compounding effect is staggering. $10,000 invested in Coca-Cola in 1990 with DRIP would be worth over $95,000 today — versus $42,000 without reinvestment.
How Aristockrat Scores Dividends
Our algorithm evaluates dividend sustainability by cross-referencing payout ratio, FCF coverage, debt levels, and historical growth consistency. Only stocks that pass all four checks receive a high Dividend Safety score.