Blue Chip Dividend Aristocrats Are Beating The Market In A Bull Run

|
Includes: AAPL, AMZN, BRK.A, BRK.B, CB, CL, FB, GOOG, GOOGL, HRL, IVV, KO, MSFT, NOBL, PEP, WMT
by: Dale Roberts
Summary

We usually count on Dividend Aristocrats and Dividend Achievers to do their thing through periods of market volatility.

I'll admit it was a surprise to read that the Dividend Aristocrats are beating the more tech heavy S&P 500 without a market correction to be the great equalizer.

There's greater stability, but also enough underlying growth in enough of the Aristocrat constituents.

On a recent visit to the Sure Dividend site, I was surprised to find this chart.

Yes, we might 'expect' the Aristocrats (NOBL) to outperform the broad market (IVV) through market corrections. That is the natural attraction of buying companies with a very meaningful dividend growth history. That the largely big blue chip Aristocrats could beat the cap weighted broad market S&P 500 funds that hold a very healthy tech component that is dominated by Apple (NASDAQ:AAPL), Alphabet (GOOG) (NASDAQ:GOOGL), Microsoft (MSFT), Facebook (FB), Amazon (AMZN) plus the world's greatest investor, Berkshire (BRK.B) (NYSE:BRK.A), is truly amazing. Capital appreciation is good for the portfolio of course, I had recently suggested that investors consider adding a growth kicker or three.

Use this slickcharts link to see the current S&P 500 individual stock weightings.

And here's the current sector weighting of the iShares Core S&P 500 ETF that tracks the S&P 500.

And here's the sector overview for the Aristocrats courtesy of that Sure Dividend page.

The S&P 500 will overweight where there is business success as recognized by the markets which price the individual stocks. The tech sector has certainly been on a tear and then some. It now represents over 21% of the iShares fund. The tech sector is just 1.8% of the Aristocrat fund.

From 2014 to end of May 2019, here's the performance of equal weight Apple, Microsoft, Amazon, Facebook and Alphabet (the holding company of Google). The chart is courtesy of portfoliovisualizer.com.

The annual returns beat is extraordinary.

How could the boring Aristocrats beat the market without any of the tech high flyers? And of course, the cap weighted funds such as IVV will be more of a momentum play, the fund and investors will take advantage of that positive market sentiment.

The Aristocrat index is dominated by 'boring' consumer staples, consumer discretionary and industrials. See this page from ProShares for the index methodology. You'll see that the index and fund is equal-weighted so that the current list of 57 companies will have near equal representation, in the area of 1.8% each. Of course, the weightings will drift based on share price movements until the rebalancing that occurs each quarter.

As Seeking Alpha author Ploutos reminds us, the equal weighting strategy outperforms a cap weighted approach for the for S&P 500 constituents. A fund that employs an equal weight strategy may employ more monies with any lesser caps and it may also find value as monies are routinely moved to the 'lesser performers' as well.

That said, at the core, there must also be enough growth within the holdings of the Aristocrat index and fund. The market may pay a premium for the stability of those Aristocrats, but that won't last for long. Over time, there has to be growth that can be rewarded with higher share prices.

When we look at the holdings within the consumer sectors, there is very muted growth. There might be a few surprises such as Hormel Foods (HRL) that offers that stability but with very solid revenue and earnings growth. But that sector bucket is dominated by more of the slow growth to no-growth Colgate-Palmolive's (CL) and Coke's (KO) and Pepsi's (PEP), and Walmart's (WMT).

We'll see the earnings and revenue growth pick up somewhat within the consumer discretionary category for the Aristocrats.

Where the Aristocrats pick up the slack

There is very solid growth within the financials.

Have a look at those punching in the growth metric on Seeking Alpha and you might get a few nice surprises.

The healthcare constituents offer growth in many quarters and at least the promise of future growth given the long-term prospects of the sector. Many dividend growth investors would say that is an attractive basket of dividend growers, though certainly not all of the companies are lighting it up with respect to earnings and revenue growth.

And for the most consistent growth metrics, we'd look to the materials sector. Enter those companies and search for the growth metrics and you will see very impressive 5- and 10-year numbers, almost right across the board.

The above grouping provides a modest market beat over the last few years.

Quality and stability with enough growth

With the Aristocrats and NOBL, we have that prospect of more stability and perhaps less failures. While the growth rates may be muted in certain sectors, there's a strong defense and a strong enough offense. I have written often that winning can come by way of not losing. With respect to the S&P 500 funds, the incredible growth of those high flying techs and a few other well-performing names has not been enough to compensate for a larger group of underperforming stocks and sectors. NOBL is concentrated in sectors where there might be more stability and consistency. Again, that divining rod of a meaningful dividend growth history can find enough long-term financial health. And there is enough of a growth engine within the Aristocrats. As I often write, winning sometimes is the result of not losing, or let's say losing less.

Better risk adjusted returns have the obvious benefits for many in the accumulation stage, and perhaps more so in retirement. I include a Canada and US Dividend Aristocrat portfolio option on this ETF Portfolio page.

And certainly NOBL has not beat the IVV fund from inception. We might call it a draw. The difference would be attributable to fees as NOBL has a .35% expense ratio compared to an incredible .04% for IVV.

That fee structure will suggest that if the trading costs make it cost effective, we simply buy enough of these Aristocrats to replicate the index. Of course, a self directed investor might be able to look at a few simple metrics to shape the portfolio with respect to the growth and risk potential.

I would suggest that you buy enough of them, and then be patient and consistent.

Boring works.

Author's note: Thanks for reading. Please always know and invest within your risk tolerance level. Always know all tax implications and consequences. If you liked this article, please hit that "Like" button. Hit "Follow" to receive notices of future articles.

Disclosure: I am/we are long BNS, TD, RY, AAPL, BCE, TU, ENB, TRP, CVS, WBA, MSFT, MMM, CL, JNJ, QCOM, MDT, BRK.B, ABT, BLK, WMT, UTX, LOW, NKE, TXN, PEP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.