Don't Be Shocked If a Few S&P 500 Dividend Aristocrats Lose Their Elite Status

When we talk dividend investing one of the gold stars investors watch closely is the S&P 500 Dividend Aristocrats, which is comprised of S&P 500 constituents that have increased their dividend payouts for a minimum of 25 consecutive years. To qualify for being an Aristocrat a company must be a current constituent of the S&P 500, meaning if a company is no longer part of the S&P 500 it cannot be an Aristocrat even if it meets the dividend payout criteria. More on that below, including a potential violator. Per S&P Dow Jones, in order to be considered for the S&P 500 a company must meet the following criteria: Be a U.S. company listed on eligible U.S. exchanges, such as the New York Stock Exchange (NYSE) or Nasdaq and file annual 10-Ks with the Securities and Exchange Commission (SEC); closed-end funds, ETFs, ADRs, ADS and certain other types of securities are ineligible for inclusion. Have an unadjusted market cap of $8.2 billion or greater. Have a float market cap of at least $4.1 billion; have at least 50% of its stock floating on stock exchanges; each year, trading volume must exceed 100% of its float, and a minimum of 250,000 shares must trade in the six months leading up to the evaluation date. Have positive as-reported earnings over the most recent quarter, as well as over the most recent four quarters (summed together). Here's the thing: Even if a company successfully clears all those hurdles it doesn't mean it will land in the S&P 500. To become part of the index, a company must get the nod from the index committee, something that is spelled out on page 10 of the S&P U.S Indices Methodology document rather plainly: Constituent selection is at the discretion of the Index Committee and is based on the eligibility criteria. On page 30 of the Methodology guide, we get some background on the Index Committee: All committee members are full-time professional members of S&P Dow Jones Indices' staff. The committee meets monthly. At each meeting, the Index Committee reviews pending corporate actions that may affect index constituents, statistics comparing the composition of the indices to the market, companies that are being considered as candidates for addition to an index, and any significant market events. In addition, the Index Committee may revise index policy covering rules for selecting companies, treatment of dividends, share counts or other matters. But here's the kicker: The Index Committees reserves the right to make exceptions when applying the methodology if the need arises. In the past, the Index Committee has stepped in. For example, in 2008 during the financial crisis, the U.S. Treasury became a 90% owner of the insurance giant AIG , which would have normally disallowed it from being part of the index. Fearing the removal of AIG might have hurt the company and the shaky financial markets, the Index Committee kept AIG in the index. Generally speaking, a constituent is removed from the index if it is Involved in a merger, acquisition or significant restructuring such that it no longer meets the eligibility criteria; Substantially violates one or more of the eligibility criteria and may be deleted at the Index Committee's discretion. One of the more recent removals from the S&P 500 this past March was retailer Macy's , which was cut because its market capitalization was $1.5 billion, a fraction of what it needed to be exiting 2019. The Index Committee replaced Macy's with Carrier Global Corp. , a company that was recently spun out of the newly formed Raytheon Technologies and has a market cap of nearly $16 billion. Before exiting 2019, the S&P 500 kicked TripAdvisor , Affiliated Managers Group and Macerich Co. to the curb, replacing them with Live Nation Entertainment , Zebra Technologies and Steris PLC . The takeaway here is the S&P 500 is not a fixed set of constituents but rather one that, at the discretion of the Index Committee, evolves over time. Again, the S&P 500 is the basis for the S&P 500 Dividend Aristocrats, so any changes to the S&P 500 can have repercussions for the Aristocrats. In light of the pandemic and its impact on U.S. businesses, particularly among the consumer discretionary companies that include restaurants and retail, we are likely to see adjustments to the S&P 500 and potentially the Aristocrats in the coming quarters. I say that because 53, or 10.5%, of the S&P 500 constituents are consumer discretionary companies such as Carnival Corp. , Darden Restaurants , Hanesbrands , Kohl's and Las Vegas Sands . Moreover, we've seen a number of S&P 500 constituents, including TJX Companies , Boeing , Walt Disney , Weyerhaeuser , Ford Motor and General Motors as well as Las Vegas Sands, suspend their dividends. It will be very interesting, to say the least, to see how the Index Committee treats suspended dividends. In reviewing market cap requirements for the S&P 500, furnishings company Leggett & Platt and its $3.9 billion market cap are below the S&P 500 minimum criteria, which could jeopardize its place in the Aristocrats even though it has increased its annual dividend for 49 years. And while Ross Stores easily clears the market cap requirement, the company will report its April quarter results after Thursday's market close. Considering the closure of its stores because of the pandemic and reports of Ross cancelling all merchandise purchase orders through June 18 back in March, investors will want to see what this recently minted Aristocrat says about its dividend. Other forthcoming dividend announcements investors will want to watch include the one from restaurant food supplier and Dividend Aristocrat Sysco Corp. . Given the pandemic, odds are high restaurants have cut back on their order flow to Sysco. And given the swings in the oil market, investors will want to keep tabs on what Aristocrats Exxon Mobil and Chevron have to say about their dividends in the weeks ahead.

Don't Be Shocked If a Few S&P 500 Dividend Aristocrats Lose Their Elite Status

The S&P 500 Index Committee has work to do as it decides which companies remain in the index, and that could impact whether some remain Aristocrats.

Columnist Conversation

We should be in for better starting soon.

Stocks Under $10

Two Good Signs -- Especially for Small-Cap Investors

COLUMNIST TWEETS

Please Join or Log In to manage and receive alerts.