NOBL: Outstanding Dividend Growth, Market-Beating Shareholder Returns, Compelling Price And Valuation

Summary

• The Dividend Aristocrats offer investors outstanding dividend growth, dividend yields, and market-beating shareholder returns.
• NOBL provides investors an easy and cheap way to invest in the Dividend Aristocrats.
• Recent underperformance and price weakness present something of a buying opportunity for investors.
• Looking for a portfolio of ideas like this one? Members of CEF/ETF Income Laboratory get exclusive access to our model portfolio. Get started today »

As economic and market conditions improve, there are fewer and fewer compelling investment opportunities available for investors. The Dividend Aristocrats are some of the few exceptions.

These stocks are particularly strong investment opportunities due to their outstanding dividend growth track record, good dividend yields, and market-beating performance. The Dividend Aristocrats are also trading at cheap prices and with historically low valuations, presenting a strong buying opportunity and entry point for investors.

The ProShares S&P 500 Dividend Aristocrats ETF (BATS:NOBL) provides investors with an easy and cheap way to invest in the Dividend Aristocrats, and is a strong buy.

Fund Basics

• Sponsor: ProShares
• Dividend Yield: 2.20%
• Expense Ratio: 0.35%
• Total Returns (NAV) CAGR since Inception: 9.5%
• Holdings: 66

Investment Thesis - Outstanding Dividend Yield and Dividend Growth, Market-Beating Shareholder Returns

NOBL's investment thesis is remarkably simple. The fund, and Dividend Aristocrats more generally, offer investors outstanding dividend yields and dividend growth, which combine to create market-beating shareholder returns.

Let's take a quick look at each of the points above.

Outstanding Dividend Growth

Dividend Aristocrats are all S&P 500 constituents that have increased their dividends for twenty-five consecutive years or more. Decades-long track records of dividend growth such as these are, in my opinion, evidence of a company's strong business model and strategy, sustainable earnings and cash flow growth, and shareholder-friendly management team. No stock or dividend is completely safe, but the Dividend Aristocrats are significantly safer than most.

NOBL itself has also seen outstanding dividend growth in the past, although there is some noise here as the dividends are a bit irregular. Dividend growth has averaged 12.34% for the past five years, quite a bit higher than the 7.93% dividend growth for the S&P 500. Dividend growth seems to be accelerating, with NOBL's dividend growing by a massive 43% quarter to quarter this past quarter. Growth is likely to slow down in the coming quarters, but results so far have been outstanding:

Data by YCharts

Strong dividend growth is almost always a positive for investors, especially so for those with a longer-term outlook. NOBL's outstanding dividend growth means that even a small position can generate quite a bit of cash after many years, especially if dividends are reinvested.

Outstanding Dividend Yield

Dividend Aristocrats generally offer slightly higher dividend yields than average. Although the differences tend to be quite small, higher yields are almost always better, especially so from blue-chip stocks with outstanding dividend growth track records.

NOBL itself offers higher dividend yields than the market average:

Data by YCharts

Higher dividend yields are almost always a benefit for shareholders, even if the benefit is quite small, as is the case for NOBL.

Market-Beating Returns

NOBL's combination of outstanding dividend growth and higher dividend yields has led to market-beating shareholder returns in the past and will, I believe, continue to do so in the future.

The reason for this is quite simple.

Shareholder returns come from either dividends or capital appreciation, and the latter tends to track dividend growth for most mature blue-chip stocks.

NOBL's dividend yield is marginally higher than that of the S&P 500, which should slightly boost shareholder returns moving forward.

NOBL's dividend growth is moderately greater than that of the S&P 500, which should also boost shareholder returns moving forward.

As such, I expect market-beating shareholder returns for NOBL in the coming years. Past performance has been outstanding as well, with the Dividend Aristocrats outperforming the market since the index's inception:

(Source: Proshares.com)

Notwithstanding the above, my forecast assumes that the fund's capital appreciation closely tracks its dividend growth, and that its relative valuation remains roughly the same in the future. This isn't necessarily true, especially in the short term, which leads me to my next point.

Valuation Analysis - Dividend Aristocrats are on Sale

NOBL's long-term performance has been outstanding, but the fund's most recent performance has been subpar, at best. NOBL is down by more than 7.6% in the year, while the S&P 500 is barely down at -3.3% for the year. Both funds seem poised for a breakthrough as lockdowns ease, as companies reopen and furloughed workers get back to work, and as a V-shaped recovery takes place. In my opinion, the more old-economy focused NOBL should see stronger performance:

Data by YCharts

NOBL, and the Dividend Aristocrats more generally, are also relatively cheaper now than in the past, at least compared to the S&P 500

The easiest way to see this is to compare the relative price of NOBL with that of the S&P 500. The following graph shows just that, with higher values indicating relatively higher prices for NOBL, and lower values indicating lower prices for the same:

Data by YCharts

As can be seen above, NOBL is trading at historically low relative prices. In fact, the fund has never been cheaper vis-a-vis the S&P 500 than now. These comparatively low prices rarely last long, with valuations usually normalizing in a couple of months, leading to outsized returns for NOBL and its shareholders.

As a quick example, and as can be seen above, NOBL was trading at comparatively low prices during March 2018, the fund outperformed during the following twelve months:

Data by YCharts

The same thing happened during April 2014:

Data by YCharts

I also took a quick look at NOBL's performance during similar months, and the pattern held. The fund has always outperformed when it was trading at relatively cheap levels vis-a-vis the S&P 500, and I believe it will do so once more.

Finally, I did a similar analysis focusing on dividend yield spreads between NOBL and the S&P 500. Said spread is also at historically high levels:

Data by YCharts

NOBL's dividend yield was also comparatively higher during mid-June 2018, and the fund went on to outperform in the following twelve months:

Data by YCharts

Seems to me that when NOBL is trading at comparatively cheap levels, like now, the fund always goes on to outperform.

Conclusion - Strong Buy

NOBL offers investors outstanding dividend growth, dividend yields, market-beating shareholder returns, and a compelling valuation. The fund is an outstanding investment opportunity, and a strong buy.

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Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.