Dividend ETFs are an easy and popular way to create diversified exposure to stocks with high dividend yield. One of the more popular ETFs in this group is State Street Global Advisors' SPDR S&P Dividend ETF (SDY). SDY seeks to match the performance and characteristics of the S&P High Yield Dividend AristocratsTM Index. The Dividend Aristocrats are stocks that have consistently raised their annual dividends over the past 25 years. In fact, each of the 54 stocks in this index is a component of SDY.
Almost all of these stocks are familiar names, like AT&T Inc. (T) and McDonald's Corp (MCD), while others, like Bemis Co Inc (BMS) and Dover Corporation (DOV), are perhaps a little less familiar to investors. However, SDY also has another 29 stocks that are not Dividend Aristocrats, including General Dynamics Corp. (GD). Back in 1993, citing an inability to redeploy capital in a post-Cold-War era, GD issued a special $20 dividend. As one would expect, the total dividends issued by GD did not increase in 1994. It appears that this excluded GD from inclusion as a Dividend Aristocrat.
I had previously written about SDY in comparison to iShares Dow Jones Select Dividend Index (DVY) and Vanguard High Dividend Yield Index ETF (VYM). The purpose of this article is to evaluate SDY's recent performance with respect to its composition of both Dividend Aristocrats and the Non-Aristocrats.
The Dividend Aristocrats Represent Different Sectors from the Non-Aristocrats
On a market value basis the 54 Dividend Aristocrats represent 71.4% of the equity assets and hence the other 29 stocks are just 28.6% of the equity. Short-term reserve investments represent about 0.1% of the total assets. The first table shows the distribution of that value across the sectors represented by the Dividend Aristocrats and the others.
Computer and Technology
One can note that Utilities and Finance sectors drive the non-aristocrat stocks and are actually over-represented relative to the Aristocrats, which are much more evenly distributed across the sectors. Furthermore, by taking these Utility stocks, it drives the SDY weighting for utilities to be above that of the S&P 500. Apparently, despite a reputation for dividends, Utility stocks apparently have occasional stumbles in paying dividends, or perhaps issue occasional special dividends, that eliminate them from being Dividend Aristocrats. In contrast, Consumer Staples are very well represented among Dividend Aristocrats. Consumer Staples are closer to 9% of the S&P 500.
The Dividend Aristocrats Appear to Have Better Valuations
There are also differences across basic valuation metrics like P/E ratio and growth. The following table looks at a couple metrics based on weighted averages across both Dividend Aristocrats and the Non-Aristocrats.
LT EPS Growth
Historical Dividend Growth
Pretty much across the board, the Aristocrats look better than the Non-aristocrats. They have a lower P/E, a lower beta, slightly higher yield and higher historical dividend growth. The two groups are probably statistically comparable in terms in of LT EPS growth and Dividend Yield, but even here the Aristocrats are slightly better. It should be noted that the Beta is a weighted average, which is not a precise calculation since there could be differences in the correlations.
Despite more Attractive Metrics, the Aristocrats Underperformed the Non-Aristocrats
So the large surprise is that over the past four months the Aristocrats underperformed the Non-Aristocrats. While it is important to emphasize that four months is not a very long period, the difference was by a factor of two to one. The Non-Aristocrats appreciated in price by about 5.1%, while the Aristocrats average price appreciation was just 2.5%. Even adjusting for market value weightings, the difference only slips to 4.5% to 2.8%. While this is only price appreciation, the two groups have nearing identical dividend yields suggesting that total return would have the same difference accounting for timing of dividends.
Given this analysis, it appears that Aristocrat designation indicates better potential. While performance is the ultimate end goal and the comparison over four months points to the Non-Aristocrats, the fact that they have less attractive metrics reduces the importance of short-term outperformance. On a forward looking basis, I would be more inclined to choose the Aristocrats. Furthermore, since the Non-Aristocrats represent distinctly different sectors, there are other considerations.
It is also important to note this is a cursory analysis. The follow up to this article will look at the Non-Aristocrats more carefully to see why they failed to qualify as Aristocrats. One would think that the payment of special dividends should not be counted against qualifying.
Additional disclosure: Disclaimer: This article is for informational and educational purposes only and shall not be construed to constitute investment advice. Nothing contained herein shall constitute a solicitation, recommendation or endorsement to buy or sell any security.