Dividend Aristocrat Performance: October 2019

Summary

• Components of the S&P 500 that have paid steadily increasing dividends for at least 25 years have outperformed the broader market over time.
• This article demonstrates that historic outperformance and lists the current Dividend Aristocrat constituents and their recent returns.
• The Dividend Aristocrat Index produced a +1.27% return in October, trailing the +2.17% return of the broad market.
• The outperformance by Tech, a meaningful underweight in the Dividend Growth strategy, contributed to its underperformance on the month.
• By showing the recent performance of the Dividend Aristocrats, some active dividend growth investors may be able to suss out relative bargains.

In yesterday's article, The Dividend Disconnect, I showed that dividend growth has done very well since the 2007 peak producing 10.88% annualized returns that beat the broad market by nearly 3% per annum. This stands in stark contrast to an index screening just the highest yielding stocks, which modestly lagged the broad market.

The outperformance by dividend growth over the last twelve years has been impressive. When you consider the fact that Information Technology is the Dividend Growth strategy's largest sector underweight, it makes the post-crisis performance even more notable to me. Only Automatic Data Processing (ADP) is listed among tech sector components of the Dividend Aristocrats (BATS:NOBL), and that feels like a stretched definition for the payroll company. While much of the relative gains of the market over the last several years have been driven by Tech, the outperformance by the Dividend Aristocrats over multiple business cycles is the simple reward for owning quality businesses that compound over time.

The tech underweight hampered the relative returns of the Dividend Aristocrats in October as tech outperformed, contributing to much of the 90bp underperformance on the month.

Source: Bloomberg

Over longer time intervals, the Dividend Aristocrats have enjoyed market-beating returns with lower realized volatility. Over the past three decades, the strategy has outperformed by 219bp per year, a figure high enough to almost cumulatively double the return of the broad index.

Source: Bloomberg

The table below lists the 57 constituents, sorted descending by indicated dividend yield, and lists total returns, including reinvested dividends, over trailing 1-, 3-, 6-, and 12-month periods. Performance data is through October 31st.

Below are some observations from the monthly list of the performance of the Dividend Aristocrat constituents:

• Some of the best performers on the month included Industrial companies that rallied on an improving tone to the U.S-China trade tensions. Leggett & Platt (LEG), Pentair (PNR), Caterpillar (CAT), and Illinois Tool Works (ITW) would all fit within that broad definition.
• Companies focused on balance sheet improvement and debt reduction like the recently acquisitive AT&T (T) and AbbVie (ABBV) have seen strong performance in recent months. The market punished companies with weaker credit profiles in 2018, but BBB-rated companies have found religion in addressing the credit profiles and the equity markets have rewarded that discipline thus far this year.
• Some of the worst performers on the month include consumer-focused businesses with weaker quarterly earnings. With a little bit of an inflection point in the economic expansion, there is a bit of negative convexity in reported results. Doing well generates modest upside, but doing poorly generates meaningful downside.

For much of the month, higher interest rates pressured these dividend-focused strategies, but the post-Fed rate rally takes that off the table as an excuse for the modest underperformance. The Dividend Aristocrat underperformance was primarily driven by the tech underweight on the month, a underweight I continue to be comfortable owning.

I hope this screen of the Dividend Aristocrats proved useful to Seeking Alpha readers trying to determine which dividend growers to build their portfolio around. I continue to prefer owning all of them through the ProShares S&P 500 Dividend Aristocrats ETF (NOBL), and the automatic periodic rebalancing to equal-weights that vehicle affords.

Disclaimer: My articles may contain statements and projections that are forward-looking in nature, and therefore inherently subject to numerous risks, uncertainties, and assumptions. While my articles focus on generating long-term risk-adjusted returns, investment decisions necessarily involve the risk of loss of principal. Individual investor circumstances vary significantly, and information gleaned from my articles should be applied to your own unique investment situation, objectives, risk tolerance, and investment horizon.

Analyst’s Disclosure: I am/we are long NOBL, SPY. 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.