We’ll kick off the new year with some more advanced study: here is another angle on Dividend Stock investing from guest author Sean Owen.

Sean is an engineer, lawyer, and writer. His articles on investing and finance have been featured by Forbes, the Huffington Post, and Seeking Alpha, among others. He blogs about financial indepedence and sustainable living at RenewableWealth.com.

The Aristocrats

Now that you’ve had an introduction to the wonderful world of dividend investing, you might ask yourself, what could be better than a company that pays you every quarter for the privilege of having you as a shareholder? How about a company that gives you a raise every year? It turns out that there are a number of companies out there with a proven track record of doing exactly that, and there’s an easy way to find them.

Enter the Aristocrats

No, I don’t mean the aristocrats from the infamous joke you may have heard about. The S&P Dividend Aristocrats is an index that consists of companies that have raised their dividends every year for at least 25 years in a row. This is an elite club indeed, because if a company ever misses a single dividend payment, or ever fails to give investors a raise, then it is booted out, and must start that 25-year clock all over again if it wants to get back in.

The index currently includes many familiar companies, like Johnson and Johnson, McDonald’s, and Wal-Mart, but there are others on the list that aren’t necessarily household names. Companies like Abbott Labs, Dover Corp, and Pitney Bowes may not make many headlines, but they have also paid increasing dividends for 25 years or more.

That period includes several nasty recessions, including the most recent one, which is the worst since the Great Depression. The share prices of these companies may have fluctuated during these rough patches, but they kept raising their dividends relentlessly through it all.

Boring is Best

Many people think of these sorts stocks as “boring.” Traders often deride them as being for “widows and orphans.” Many will tell you that a company that has paid increasing dividends for 25 years is too big to grow. My response to that is, as my dad would say, horse hockey. The Dividend Aristocrats have outperformed the S&P 500 over the previous 5, 10, and 20 year periods — quite handily, in fact.

Here’s another way to look at it: A company that pays steadily rising dividends is a company that makes so much money, year after year, that it simply can’t use it all, and they believe the best use of all that extra cash is to reward their shareholders. That sounds like a company I want to own.

An Example from Warren Buffett

For a great illustration of the amazing power of dividend growth investment in general, and dividend aristocrats in particular, we need look no further than the world’s greatest investor. Warren Buffett established a position in dividend aristocrat Coca Cola in 1994. Check out his comments on that investment from a letter to Berkshire Hathaway shareholders:

Coca-Cola paid us $88 million in 1995, the year after we finished purchasing the stock. Every year since, Coke has increased its dividend. In 2011, we will almost certainly receive $376 million from Coke, up $24 million from last year. Within ten years, I would expect that $376 million to double. By the end of that period, I wouldn’t be surprised to see our share of Coke’s annual earnings exceed 100% of what we paid for the investment. Time is the friend of the wonderful business.

You read that right — by 2021, if Coca Cola stays on its current trajectory, the shares Buffett bought will earn more in dividends alone every year than his entire investment back in 1994. How’s that for boring?

My Shares Have Gone Down? Awesome!

There’s a sort of magic in investing in companies like these. When you stay focused on collecting your paychecks from the companies you own, rather than the share price, you can ignore the wild fluctuations in the stock market that keep less enlightened investors awake at night. You can simply sit back and collect ever-increasing income from your portfolio.

In fact, if you reinvest your dividends (which I highly recommend you do), you might just learn to love it when your favorite companies’ shares go down. How can that be? Because those reinvested dividends will buy you more shares when the price is low, which will in turn earn even more dividends in the years to come.

Investing in the Aristocrats

So what’s the best way to invest in the Dividend Aristocrats? One simple way is this the SPDR S&P Dividend ETF (SDY). This is an exchange traded fund that tracks the S&P High Yield Dividend Aristocrats index. This is a slightly different index which includes Dividend Aristocrats from the S&P 1500, rather than just the S&P 500, but it has the same 25-year dividend growth requirement. It has reasonably low expenses, and currently sports a very respectable 3.3% dividend yield.

If you don’t want to put a whole lot of time in learning how to evaluate individual stocks, you could very well just stop here. The holdings in SDY are quite well diversified, and represent many of the most rock-solid companies across a wide variety of sectors. It’s a portfolio that will let you sleep well at night, whichever way the market is moving.

An Elite Cheat Sheet

If you prefer to pick your own stocks, whether you’re a seasoned pro or just starting out, there are no shortcuts. Doing your homework on each and every stock you consider for investment is absolutely essential to your success. It can be a daunting task when you have thousands of stocks to choose from.

The 2012 High Yield Dividend Aristocrat index only has 61 companies on it, though. If you narrow your search to these, doing your due diligence suddenly feels a lot more doable.

In fact, it’s perfectly feasible to do a thorough analysis on each and every company on the list, and that’s precisely what I recommend you do before investing a dime, especially if you are new to investing.

For a great primer on valuing stocks, check out the Intelligent Investor, by Warren Buffett’s mentor, Benjamin Graham. Read it, and then get to work combing the Aristocrats for bargains. It will be time well spent. You will be a much better investor when it’s done, and you will have an opportunity to practice the #1 most important skill for any investor to have: patience.