As has been highlighted in this space, the ProShares S&P 500 Aristocrats ETF (CBOE: NOBL) recently added four new components.
NOBL tracks the S&P 500 Dividend Aristocrats Index, a benchmark that only includes companies that have boosted dividends for 25 consecutive years. Two of NOBL’s newest members are Dow components Caterpillar Inc. (NYSE: CAT) and United Technologies Inc. (NYSE: UTX). The other two — insurance provider Chubb (NYSE: CB) and People’s United Financial Inc. (NASDAQ: PBCT) – hail from the financial services sector.
Dividend growth strategies, including NOBL, often feature exposure to the quality factor and a recent analysis of NOBL’s underlying index confirms as much.
“Risk decomposition of the S&P 500 Dividend Aristocrats using Axioma’s US Fundamental Equity Risk Model MH4 supports the view that the index contains elements of the quality factor,” said S&P Dow Jones Indices. “Our definition of quality uses return on equity, accruals ratio, and financial leverage ratio. Of these three calculations, Axioma’s Risk Model decomposes risk into profitability (return on equity) and leverage. A snapshot of the index on Jan. 31, 2019, shows us that the index is more actively exposed to those two factors than is the S&P 500, with profitability’s active exposure at 0.04 and leverage’s at 0.13. Profitability’s contribution to risk is relatively small at 0.59%, and leverage reduces it by 0.33%.”
Good Over The Long Haul
Dividends are often viewed as a quality trait, but investors looking for credible combinations of dividends and the quality should assess factors beyond pure yield. Those factors include return on equity (ROE) and a company’s ability to sustain and grow payouts.
“Moreover, the average active exposure for the 10-year period studied was 0.33 and -0.27 for dividend yield and market sensitivity, respectively,” according to S&P Dow Jones. “In other words, the S&P 500 Dividend Aristocrats achieved higher dividend yield than its benchmark, and at the same time was less sensitive to the market. This shows us that the index was more quality oriented, had lower active exposure, and achieved higher yield than the benchmark.”
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Quality stocks with track records of dividend growth can help investors mitigate some of the impact of increasing margin pressure, should that scenario emerge. NOBL currently features a combined weight of 45.43% to the industrial and consumer staples sectors, significant overweights to those groups relative to the S&P 500.
“The weight difference between the benchmark and the S&P 500 Dividend Aristocrats suggests that the latter’s Consumer Staples and Industrials sectors may have more quality due to their greater ability to provide consistent dividends. The new constituents of the S&P 500 Dividend Aristocrats Class of 2019 not only enhance the quality factor of the index, but also deepen the Industrials sector bias,” according to S&P Dow Jones.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.