Dividend Aristocrat Performance: April 2020

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.
• While the Dividend Aristocrats have outperformed in the last six down years for the broad market, the strategy's relative underperformance this year continued in April.
• At +10.6%, the Dividend Aristocrats had their best monthly performance since April 2009, but still lagged the S&P 500.
• By showing the recent performance of the Dividend Aristocrats, some active dividend growth investors may be able to suss out relative bargains.

Dating back to at least 1990, March 2020 was the worst monthly performance for the Dividend Aristocrats (-13.6%). April 2020 (+10.6%) was the best monthly performance since April 2009 (+12.2%) during the early recovery period from the Financial Crisis. While the strategy had its best return in eleven years, it still lagged the S&P 500 (+12.8%), which had its best month since January 1987. It has been quite a two-month move for this strategy and markets broadly.

Historically, the Dividend Aristocrats (BATS:NOBL) have collectively offered higher total returns - outperforming the S&P 500 (SPY) in each of the past six down years for the broad market - while generating better upside, a nearly 2% higher annual total return over our thirty year sample period. In the unique pandemic-induced correction in 2020, the Dividend Aristocrats performed worse in the downturn and have lagged in the recovery.

Source: Bloomberg

In the table below, the list of the 64 current Dividend Aristocrat constituents is 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 the end of trading in April. For purposes of this article, I have excluded recent United Technologies spin-offs Carrier Global (CARR) and Otis Worldwide (OTIS).

The next two charts contrast the very different monthly performance for the constituent-level holdings. In April, only five Dividend Aristocrats - Cincinnati Financial (CINF), Walgreens Boots Alliance (WBA), Chubb (CB), Becton Dickinson (BDX), and General Dynamics (GD) - posted negative total returns.

While in March, only five companies had posted positive total returns - Hormel (HRL), Clorox (CLX), WalMart (WMT), Abbott Labbs (ABT), and Walgreens Boots Alliance.

Notable takeaway from April's performance:

• In this public health crisis-driven economic correction that has spawned increased demand for remote work access and an increased reliance on e-commerce, the strategy's underweight to Tech (1.5% vs. 25.2% market benchmark), underweight to Healthcare (-4.8%), and exclusion of e-commerce and cloud computing giant Amazon (AMZN) has weighed on the strategy. The outperformance of tech and Amazon continued in April.
• Only 5 constituents have produced a positive total return over the last three months - Clorox +19.2%, WalMart +6.7%, Abbott 6.1%, AbbVie +2.9%, and Johnson & Johnson (JNJ) +1.4%. Three healthcare companies, a down market grocery giant, and a maker of disinfectant are your leaders, which speaks volumes about the current crisis.
• In a month where front end oil futures traded sharply negative as oil storage fills from the Covid-19 reduction in demand, Chevron (CVX) and Exxon Mobil (XOM) were two of of the top performers, rallying 27% and 22% respectively. Energy (XLE), up nearly 30% on the month, was the best performing subsector of the S&P 500 as producers rallied on hopes of a resumption of demand from easing shut-downs.
• Outside of the Energy space, some of the worst performers in March were among the best performers in April. To make the Dividend Aristocrats list, these companies have paid increasing payouts to shareholders for at least a quarter century. If you ultimately believe that a particular company has the continued financial wherewithal to continue paying increasing payouts to shareholders, then there may be some opportunity to target some of these companies on dips. Food distributor Sysco (SYY) was the fourth worst performer in March and fourth best performer in April. The company accessed the debt capital markets in late March to bridge its liquidity pressure in the short-run. Similarly, Leggett & Platt (LEG), a manufacturer of home and office furniture, was the third worst performer in March and best performer in April. There could be an opportunistic strategy to employ on these issuers in topical subsectors of the market being uniquely stressed in the current environment.

The Dividend Aristocrats have lagged in 2020, failing to demonstrate the defensiveness the strategy has shown in previous downturns. While unique underweights to outperforming sectors is driving much of this underperformance, an element of how this strategy is constructed could provide a little more upside in the ultimate recovery then one might expect. In "Strategies to Buy the Dip", I noted that equal-weighting the S&P 500 has tended to strongly outperform the cap-weighted S&P 500 in the year after stocks bottom. The Dividend Aristocrat Index is also an equal-weighted strategy, and at its quarterly rebalancing, the strategy will add increased weights to underperforming constituents. It was a good absolute month for the strategy, but relative performance has been lackluster. Perhaps contrarian rebalancing and an underweight to higher multiple parts of the market, can help close this performance gap over coming months.

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.