The 2021 ESG Dividend Aristocrats

In brief:

• The Dividend Aristocrats are companies of the S&P 500 that have paid steadily increasing dividends for at least 25 years have outperformed the broader market over time.
• In April 2021, S&P launched sustainable versions of its popular Dividend Aristocrats indices
• There are five Dividend Aristocrats Indices that incorporate environmental, social, and governance (ESG) criteria.

The Dividend Aristocrats are a select group of  S&P 500 stocks with 25+ years of consecutive dividend increases. These 65 are large, US companies that have historically provided (slightly) better performance and (slightly) lower volatility than the S&P 500 as a whole.

S&P DJI introduced five new Dividend Aristocrats Indices that incorporate environmental, social and governance (ESG) criteria. The indices launched in 2021 are:

• S&P Developed ESG Dividend Aristocrats Index
• S&P ESG High Yield Dividend Aristocrats Index
• S&P Global ESG Dividend Aristocrats Index
• S&P Global ESG Dividend Aristocrats Quality Income Index
• S&P Euro ESG High Yield Dividend Aristocrats Index

From a US investor’s point of view the S&P Developed ESG Dividend Aristocrats Index, which includes 20 U.S. companies among its 100 constituents, and the S&P ESG High Yield Dividend Aristocrats Index, which consists entirely of U.S. firms are the most interesting.

European dividend investors could use the S&P Euro ESG High Yield Dividend Aristocrats Index as a source to identify ESG dividend stocks.

There are several differences between the “original” dividend aristocrats and the above ESG indexes. For example, companies in the S&P ESG High Yield Dividend Aristocrats Index must have paid out a higher dividend for at least 20 straight years—a bit less than the 25-year standard for the dividend aristocrats. Factors like ESG-scoring and high yield are also part of the selection process.

The S&P Developed ESG Dividend Aristocrats is designed to measure the performance of 100 high dividend-yielding and ESG-scoring companies that have followed a dividend policy of increasing or maintaining dividends for at least 10 consecutive years.

A much broader selection of stocks is used since the reference index is the S&P 1500 and not the S&P 500.

There’s a growing pile of evidence indicating that stocks of companies that meet the standards for ESG-factors are likely to outperform the market and one of the reasons while S&P introduced this ESG index series. (read more on ESG Investing)

Bank of America Merrill Lynch presented 10 reasons why one should care about ESG. Three interesting reasons are:

1. ESG could boost your returns by a significant amount: a strategy of buying stocks that rank well on ESG metrics would have outperformed the market by up to 3 percentage points per year over the last 5 years.
2. Traditional financial metrics, such as earnings quality, leverage, and profitability don’t come close to ESG as a signal of future earnings volatility or bottom-line risk.
3. 15 out of 17 (90%) bankruptcies in the S&P 500 between 2005 and 2015 were of companies with poor Environmental and Social scores five years prior to the bankruptcies.

The S&P ESG High Yield Dividend Aristocrats Index has a difficult time proving that ESG could outperform the market. In September 2021, the ESG High Yield Dividend Aristocrats 10 years annualized return was 14.43%, while its benchmark (S&P 1500) total return was 16.14%. The two charts below clearly display the underperformance.

The S&P Developed ESG Dividend Aristocrats Index includes 20 U.S. companies among its 100 constituents, and the S&P ESG High Yield Dividend Aristocrats Index, consists entirely of 81 U.S. companies (October-2021).

As of August 31, the U.S. ESG high-yield Aristocrats index’s largest sector weightings included consumer staples (16.8%), and industrials (16.5%), and financials (11.5%). Below is the full sector breakdown:

The top 10 constituents of the S&P ESG High Yield Dividend Aristocrats are:

1. AT&T inc (T)
2. Exxon Mobil Corp (XOM)
3. Chevron Corp (CVX)
4. AbbVie (ABBV)
5. Nucor Corp (NUE)
6. People’s United Financial (PBCT)
7. Federal Realty Invt Trust (FRT)
8. Intl Business Machines (IBM)
9. Franklin Resources (BEN)
10. Realty Income (O)

The 20 US stocks included in the S&P Developed ESG Dividend Aristocrats Index are:

1. Exxon Mobil
2. AT&T
3. H&R Block
4. Brandywine Realty trust
5. South Jersey
6. LTC Properties
7. IBM
8. Seagate Technology
9. Highwoods properties
10. Pfizer
11. Interpublic group
12. Verizon
13. People’s United Financial
14. Comerica
15. Huntington Bancshares
16. Franklin Resources
17. Keycorp
18. Principal Financial Group
19. Unum Group
20. Janus Henderson Group

To see Chevron and Exxon Mobil in the top-10 could be a surprise to investors. The high dividend yield and the long-lasting dividend track record could be a reason why they are included in the S&P ESG Index. The ESG Risk rating for both companies is very high or “Severe” based on the information of the ESG company Sustainalytics.

Here is how you should read the Sustainalytics:

Lower is better, with 0 indicating that a company has no unmanaged ESG risk and 100 indicating the highest level of ESG risk. In practice, most scores range from 0 to 50, assigned to five risk categories:

• 0-9.99: Negligible ESG Risk
• 10-19.99: Low ESG Risk
• 20-29.99: Medium ESG Risk
• 30-39.99: High ESG Risk
• 40+: Severe ESG Risk

Here is a more visual representation of this ESG scale.

Here are the top 10 constituents of the S&P ESG High Yield Dividend Aristocrats and their ESG Risk Rating (October 14, 2021):

1. AT&T inc (19.3 Low Risk)
2. Exxon Mobil Corp (35.8 High Risk)
3. Chevron Corp (41.2 Severe Risk)
4. AbbVie (27.4 Medium Risk)
5. Nucor Corp (36.6 High Risk)
6. People’s United Financial (23.8 Medium Risk)
7. Federal Realty Invt Trust (12.4 Low Risk)
8. Intl Business Machines (14.6 Low Risk)
9. Franklin Resources (19.2 Low Risk)
10. Realty Income (14.2 Low Risk)

Looking at the ESG rating, ESG investors should probably not include Exxon Mobil, Chevron, and Nucor Corp in their portfolio.

In October 2021, we also added the MSCI ESG rating to our dataset, read more on this rating on the page MSCI ESG rating explained. This MSCI ESG rating is also available on the factsheet pages for several stocks. See for example 3M (MMM).