The S&P 500 Dividend Aristocrats (BATS:NOBL) - an exclusive group of large-cap U.S. equities that have raised dividends for a minimum of 25 consecutive years - make for a great starting point when building a dividend growth portfolio. I track them all each month to keep readers informed of their performance against their peers. Monthly updates are divided into four sections, as follows:
- An overview of the 65 Dividend Aristocrats, including the selection process, historical performance, and summary statistics like forward yields and dividend growth rates.
- A performance table showing one-month, three-month, six-month, one-year, two-year, and three-year returns for each constituent compared to the S&P 500 and sector peers.
- A distribution analysis comparing forward yields to each company's minimum, maximum, and average yields over the last five years. A yield distribution metric alerts investors to when a company's yield is favorable.
- A financial health analysis of each Aristocrat which includes their cash to total debt ratio, payout ratio, free cash flow margin, and revenue growth rates.
Beginning this month, I've added a "Contenders" section, where I'll highlight nine stocks I feel have a good shot at joining the list soon. But first, to earn the distinction of a Dividend Aristocrat, a company must have increased its dividends for 25 consecutive years and meet specific market capitalization and liquidity requirements. ProShares, the provider for the S&P 500 Dividend Aristocrats ETF, charges an expense ratio of 0.35% and has $8.50 billion in assets under management. ProShares also includes the following:
Constituents are reviewed once annually in March and rebalanced to an equal-weight quarterly after the close of the last business day in January, April, July, and October. This means that starting this month, we're back to equal weight.
Sector Allocations and Top Holdings
The chart below shows how different NOBL's composition is versus the iShares Core S&P 500 (IVV). Generally, the Aristocrats have higher allocations to defensive sectors like Consumer Staples, with less dedicated to growth sectors like Technology.
Source: Created By Author Using Data From ProShares and iShares
ProShares also lists its holdings daily, with the top ten shown below.
Since NOBL launched in late 2013, it has had mixed results compared to the S&P 500 and the Invesco S&P 500 Equal Weight ETF (RSP). The graph below shows the performance of the three.
You'll see the performance gap begin to widen around April 2020. This isn't because dividend consistency is suddenly a bad screen, but more because of its minimal exposure to the Technology sector. In 2020, NOBL underperformed by 10%, which accounts for the majority of its underperformance since inception. It last won out in 2018 when it lost 3.28%, and investors will appreciate that they are generally less risky assets. Total risk, as measured by standard deviation, is typically low. In addition, up until the end of 2019, NOBL had the best downside risk-adjusted returns of the three. I would argue that in sustained market downturns, NOBL is better able to protect your capital.
If risk isn't your concern, perhaps NOBL still looks like a poor choice. However, by going back a little further past its inception date of October 2013, you'll see the underlying Index has performed quite well over the last ten years. The graph below shows an annualized return of 15.18% compared to 15.35% for the S&P 500 Index and 14.32% for the S&P 500 Equal-Weighted Index. This narrowing of the gap implies a sizable outperformance in 2011, 2012, and the better part of 2013.
Source: S&P 500 Dow Jones Indices
There are currently 65 constituents in the Index, sorted below by sector along with some high-level statistics.
Source: Created By Author Using Data From Seeking Alpha And iOCharts
The five-year beta of 0.92 is steady, indicating that the Aristocrats tend to be less volatile assets. When it comes to Technology, I think the criteria are perhaps a bit too strict, so I'd like to see investors supplement this ETF with some growth stocks to avoid too much underperformance in bull markets. The average forward yield is only 2.46%, so only about a percentage point higher than the S&P 500. I doubt this will make much difference for the high-yield-seeking investor, but the focus is undoubtedly on growth. The average Aristocrat has increased dividends for 43 consecutive years and has grown dividends at an annualized 7.72% rate in the last five years. Like Procter & Gamble (PG) and 3M (MMM), a few have grown dividends for over 60 straight years.
Periodic Performances & Attribution
The table below shows the total returns of each Aristocrat on a one-month, three-month, six-month, one-year, two-year, and three-year basis.
The average Aristocrat gained 2.13% in July compared to 2.44% for the S&P 500. Here are the primary reasons for the miss:
1. For the second straight month, NOBL underperformed because of its low allocation to tech stocks. The SPDR Select Technology ETF (XLK) returned 3.89%, and NOBL is underweight this sector by 26.18%. This asset allocation difference alone contributed to 1.14% in underperformance.
2. Offsetting this was an excellent performance in the Materials sector. Albermarle (ALB) soared 22% after lithium stocks caught fire. Ecolab (ECL), Linde (LIN), and Nucor (NUE) all outperformed, too, and the Materials sector boosted NOBL's performance by 0.74% in total.
3. Industrials held up well again for the second straight month. The SPDR Materials Select Sector ETF (XLB) returned 0.94% in July, but the Average Industrials Dividend Aristocrat gained 2.63% due to solid performances from Dover (DOV) and Pentair (PNR).
A company's yield history is one way to determine the attractiveness of a company's share price. The Dividend Aristocrats are good candidates for this strategy, as they have excellent dividend payment histories and relatively stable prices. With this method, I suggest focusing your research on the Aristocrats with yields far above their historical averages. It's value investing in its simplest form, and I always caution that investors should be prepared to hold these stocks for the long term.
The following table shows the forward yields of each stock alongside their minimum, maximum, and average yields over the last five years. In addition, the final column shows the yield distribution. For example, the 4.20% forward yield for Consolidated Edison (ED) is currently higher than it's been 85.24% of the time over the last five years. Value investors looking to purchase potentially discounted shares would favorably view a higher yield distribution value and look to make a buy.
It's worth pointing out that of the 65 stocks, only 18 have yield distributions above 50%. In other words, there aren't many great opportunities. I'd recommend being extremely selective with asset prices as high as they are.
While the yield distribution table above is helpful, investors should not follow it blindly. Often, there are good reasons why a stock's yield is high. Looking at a company's financial health and, in particular, how much cash it's generating, the value of its debt, and how well sales are growing are all critical when evaluating a company. The table below summarizes some of the key metrics I like to focus on for dividend ETFs.
A low payout ratio (less than 65%) and a sustainable cash to total debt ratio (more than 50%) are features of a successful dividend stock, in my view. I'd also like to see positive free cash flow margins and revenue growth rates of 5% or more. Ten companies meet these criteria, and with the Industrials sector doing so well lately, I thought Automatic Data Processing (ADP) was worth highlighting.
ADP's yield is practically the lowest it's been in five years. However, it's grown dividends at a rate of 12.21% over the last five years. Cash to total debt is 92%, the payout ratio is 56%, and revenues are growing steadily at a rate of about 5% per year. ADP isn't a defensive holding with its beta of 1.08, but I think selecting a slightly riskier asset could be beneficial for the average dividend investor.
Dividend Aristocrat Contenders
When it comes to searching for the next S&P 500 Dividend Aristocrat, there are two places to look:
- Within the S&P 500 itself, specifically for stocks with 23 or 24 years of consecutive dividend payments
- Within the S&P Midcap 400 Dividend Aristocrats (REGL) for stocks that meet the new market capitalization threshold of $13.1 billion
The table below highlights the nine contenders I've identified as having the best chance for inclusion in March, the next reconstitution date.
Church & Dwight (CHD) seems poised to earn Aristocrat status. The company's website highlights that dividends were paid every year since 1976, but there was a slight hiccup in 1995-1996 when they didn't raise their dividends. It's been smooth sailing ever since, though, and its $21.31 billion market capitalization easily clears the $13.1 billion threshold.
Graco (GGG) is another likely addition soon, further cementing the hold Industrials have on the Index. This manufacturer of fluid-handling systems is currently the 12th largest stock by market capitalization in the S&P MidCap 400 and has raised dividends for 24 consecutive years. Investors will notice a drop in ordinary dividends from 1996 to 1997, so we'll likely have to wait until March 2023 for this one.
Note that Graco is currently a member of the S&P 400 MidCap Dividend Aristocrats thanks to the Index's requirement of only 15 years of consecutive dividend increases. I'll be reviewing those in detail, too, so look for a post on REGL in the coming days.
The Aristocrats narrowly underperformed last month, but its lower exposure to the Technology sector was the reason. In fact, the positive selection effect indicates that the Aristocrats outperformed their S&P 500 peers, so I don't see any reason to be concerned with the strategy. I also like how well NOBL is holding up this year despite the bull market. Putting things in perspective, NOBL is a defensive dividend ETF and is off by just 1% against the S&P 500 this year, which has gained over 18%. I think that's encouraging, and if there's a rotation out of growth stocks to come later this year, NOBL should be in a great position to benefit.