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Ask a Fool: What Are Dividend Aristocrats, and Should I Invest in Them?

Q: I've seen headlines about "Dividend Aristocrat" stocks. What does that term mean, and are these stocks really such great investments?

A Dividend Aristocrat is a stock that is a member of the S&P 500 index and has increased its dividend every year for a minimum of 25 consecutive years.

For example, of the 51 current Dividend Aristocrats, McDonald's has increased its dividend for 40 consecutive years, and healthcare giant Johnson & Johnson has increased its payout for 54 years in a row.

Now, just because a stock's dividend has increased consistently for decades doesn't guarantee that it will continue to do so. However, a strong record of dividend increases indicates that a company has grown its profits nicely over time, which is indicative of a durable competitive advantage. In other words, these are strong, income-generating companies that have stood the test of time.

Over time, the Dividend Aristocrats have a history of outperforming the overall S&P 500, but just like any other group of stocks, not all are excellent investments merely because they're a member of a high-performing index.

Some investors may choose to research and invest in individual Dividend Aristocrats. For others, a fund that tracks the index -- such as the ProShares S&P 500 Dividend Aristocrats (NYSEMKT: NOBL) -- can be a smart way to get broad exposure to all of the stocks that qualify as Dividend Aristocrats without relying too much on the performance of any single stock. None of the index components account for more than 2.5% of the fund's holdings, and its 0.35% expense ratio is below average for funds with similar objectives.

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Offer from The Motley Fool: The 10 best stocks to buy now
Motley Fool co-founders Tom and David Gardner have spent more than a decade beating the market. In fact, the newsletter they run, Motley Fool Stock Advisor, has tripled the S&P 500!*

Tom and David just revealed their ten top stock picks for investors to buy right now.

Click here to get access to the full list!

*Stock Advisor returns as of July 6, 2017.

Matthew Frankel has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Johnson & Johnson. The Motley Fool has a disclosure policy.