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. The FY 2019 performance is 27.97% for the Dividend Aristocrats, versus 31.49% for the S&P 500 index.
Higher total returns with lower volatility
Higher total returns with lower volatility are typical characteristics of the Dividend Aristocrats. The Dividend Aristocrats have historically shown smaller draw-downs during recessions versus the S&P 500. For example in 2008 the Dividend Aristocrats Index declined 21.9%, compared to the S&P 500 declined by 37%. In 2018 the Dividend Aristocrats (-2.73%) also outperformed the S&P500 (-4.38%) by 1.65%.
The lower volatility gives some investors “peace of mind” but comes also with a price. In a bull market, like 2019, the Dividend Aristocrats typically underperform. In 2019, the Dividend Aristocrats ( 27.97%) underperformed the S&P 500 index ( 31.49%) by 3.52%
The table below lists the yearly performance of the Dividend Aristocrats, the S&P 500 and the difference between the two.
Some additional data on the Dividend Aristocrats Index:
- 10 Years annualized return: 14.75%
- 10 years annualized risk: 11.18%
- PE-ratio (trailing): 20.97
- Dividend yield: 2.43%
One good explanation for the current underperformance is the sector weighting of the Dividend Aristocrats. The dominating sectors are more defensive like Industrials (23.1%) and Consumer Staples (22.6%). The IT-sector represents only 1.7%.
The Dividend Aristocrats did not have Amazon (AMZN), Advanced Micro Devices (AMD) nor Microsoft (MSFT), to get to a sector contribution like the S&P 500.
Buy & Hold approach made easy
Dividend growth investing and a buy & hold approach go hand in hand. “Life is made easy” when investing in the Dividend Aristocrats Index, any holding period of 4 years or longer would have resulted in a positive performance. The diagram below shows the performance per holding period.
This performance/yield triangle shows the average annual returns for any investment periods, ie combinations of buy and sell times on an annual basis. The “year of buy” is plotted on the horizontal axis and the “year of sell” on the vertical axis. The average annualized return can be seen at the intersection of these two coordinates.
For example, those who acquired the dividend aristocrats at the end of 2008 and sold them at the end of 2009 achieved an average annual return of 26.60%. With an exit in 2010, however, a per-annum return (CAGR) of 22.87% is calculated.
The average data in the bottom indicate which average annual yield was achieved at the start of the respective year. Starting with a position in the aristocrats at the end of 2008, Dividend Aristocrats (buy&hold) investors made e.g. average annual price returns of 18.63%.
2019 Leaders and laggards
In contrast to the negative performance in 2018, both the Dividend Aristocrats and S&P 500 index showed a very strong performance in 2019. Only 4 out of the 57 Dividend aristocrats showed a negative price performance, which are:
- Abbvie (ABBV)
- 3M Company (MMM)
- Franklin Resources (BEN)
- Walgreens Boots (WBA)
Given Abbvie’s dividend yield of +4%, the total return is positive for the full-year 2019.
- Target Corporation (TGT)
- Dover Corporation (DOV)
- S&P Global (SPGI)
- Cintas (CTAS)
Given last year’s performance, the 2019 top-performers will typically be overvalued, while most of the laggards will be undervalued. For example, Franklin Resources’ (BEN) current dividend yield is 108% above its 5-year average, so this stock might be undervalued. Target (TGT) looks overvalued based on the current dividend yield which is -38% below its 5-year average. All based on the assumption that dividend growth stock will eventually return to its 5-year average dividend yield.
The table below lists all 57 constituents, sorted by 1-year price change and lists last month’s change, dividend yield, and PE-ratio.
Whatever the 2020 election year investors will bring, an extended bull market or the start of the bear market. The Dividend Aristocrats Index (NOBL) is a great “place to be” for dividend growth investors.