In the world of dividend-paying stocks, there are the usual dividend payers among the S&P 500 and then there are the Aristocrats, those stocks that have increased their payouts every year for the past 25.
No matter what the time horizon, the S&P 500 Dividend Aristocrats have outperformed the S&P 500, while experiencing lower volatility, according to a new report from S&P Dow Jones Indices.
These 50 securities, equally weighted, have had an annual return of 11.9% between January 31, 1990 and April 29, 2016 compared to 9.2% for the broader S&P 500, according to a the report.
During that same time period the annual volatility of the Dividend Aristocrats index was 13.5% compared to 14.6% for the broader index. That combination of higher return with lower volatility resulted in a higher 0.9% annual risk-adjusted return (return dividend by volatility) compared to a 0.6% for the S&P 500 overall.
The Dividend Aristocrats index also has a higher yield than the S&P 500, ranging between 2% and 4.4%from January 1998 to January 2016, almost double the yield of the broader S&P 500 during that same time period.
In addition, its maximum loss between peak and trough was 44.1% versus almost 51% for the S&P 500 and the average outperformance, was 54% for all months between January 31, 1990 and April 29, 2016.
The majority of the outperformance of the Dividend Aristocrats is due to security selection and “the interaction effect” between security selection and portfolio allocation, according to the S&P Dow Jones Indices report.
The Aristocrats index is much more broadly diversified than the S&P 500 despite its higher concentration of assets – 50 stocks compared to 500. It includes 10 industry sectors while “many dividend-yield strategies … tend to be concentrated in the financials and utilities sectors to achieve a high yield,” according to the S&P Dow Jones Indices report.
As of December 2015, financials comprised just under 12% of the Aristocrats index while utilities accounted for 2%. Consumer staples led with 26%, followed by industrials,16.4%, and health care, 13.5%.
In addition, no sector in the Aristocrats index can have a weighting of more than 30% when the index is rebalanced every quarter, after the close of the last trading day for that quarter.
Aye Soe, senior director of Global Research & Design, at S&P Dow Jones Indices, describes the Dividend Aristocrats as a “concentrated portfolio with lower volatility.”
Turnover in the index is also limited, usually just one change a year, except in 2009, when 10 stocks were replaced, according to Soe. That was the year that stocks hit bottom, in March, following a 17-month drop of more than 50% during the financial crisis.
The quality of its holdings is another differentiator for the S&P 500 Aristocrats. As of December 31, 2015, nearly 63% of its constituents were ranked “A” or higher by S&P Dow Jones Indices compared to just 19% in the broader index.
Also, unlike traditional income-seeking strategies which tend to weigh value stocks more heavily, the Dividend Aristocrats index includes both growth and value stocks without any persistent tilt to either over time.
Advisors interested in the Dividend Aristocrats strategy might want to consider the ProShares S&P 500 Aristocrats ETF (NOBL), which has returned almost 14% year-to-date, twice the gain of the S&P 500.
In the same spirit though not identical to the S&P 500 Aristocrats Index are the SPDR S&P Dividend ETF (SDY), Vanguard Dividend Appreciation Index ETF (VIG) and S&P Global Dividend Aristocrats Index ETF (WDIV).
SDY includes about 100 stocks in the S&P High-Yield Dividend Aristocrats Index, a subset of the S&P 1500 which includes S&P large-cap, mid-cap and small-cap stock indexes.
VIG invests in the Nasdaq U.S. Dividend Achievers Select Index, comprised of about 160 companies that have increased their dividends for at least 10 years running. And WDIV follows the S&P Global Dividend Aristocrats Index, which includes U.S. and foreign companies that have also raised their dividends for at least 10 consecutive years.
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