ETF investors who are still worried about market conditions can look to a quality strategy that focuses on the elite Dividend Aristocrats to rise above the uncertainty.
On the recent webcast, Uncertain Equity Markets and the Dividend Aristocrats, Aye Soe, Managing Director of Global Research & Design at S&P Dow Jones Indices, highlighted the importance of dividends on returns, pointing out that dividends have contributed to approximately 28% of total return of the S&P 500 since 1960.
Soe added that being consistent in dividend payouts also paid off as those that have consistently increased dividends exhibited higher returns and lower volatility, compared to their broad stock market benchmarks. Dividend payers have outperformed non payers and the broader market, producing a higher Sharpe ratio or improved risk-adjusted returns, with a lower standard deviation and greater performance relative to their benchmarks.
Simeon Hyman, Director and Global Investment Strategist at ProShares, underscored the long-term outperformance and lower volatility associated with dividend growers. In the period between 1987 through 2017, dividend growers within the Russell 3000 generated an annualized 13.8% return with an annualized volatility of 14%. In comparison, dividend non-changers returned 10.2% with a 17% volatility, dividend non-payers returned 7.7% at 24% volatility, and dividend cutters saw a 6.5% return with 22% volatility.
“There are common traits that define high quality companies that grow their dividends. They tend to have long histories of profit and growth. They typically have strong fundamentals and stable earning streams. And their strength comes from the top, from management teams with conviction and a firm commitment to shareholders,” Hyman said.
The dividend growth story has also consistently outperformed over time. Looking at the three-year rolling returns, the S&P 500 Dividends Aristocrats Index outperformed the S&P 500 111 of the 129 periods, or 88% of the period, from 2005 through 2018.
To better track this group of quality company stocks, investors can look to the ProShares S&P 500 Aristocrats ETF (BATS: NOBL), which measures stocks with a long track record of dividend growth with companies increasing dividends for at least 25 consecutive years. Of the companies within the underlying index, 64% have grown their dividends more than 40 years and 17% grown their dividends more than 50 years.
When the markets experienced wild swings, dividend aristocrats remained on a relatively more stable footing. For example, over the period between October 2018 and December 2018, when the S&P 500 fell close to 14%, the S&P 500 Dividend Aristocrats Index dipped 8.6%. The dividend aristocrats characteristic also held up over the mid- and small-cap categories, with the S&P MidCap 400 Dividend Aristocrats Index down 8.5% compared to the S&P MidCap 400’s 17.3% decline and the Russell 2000 Dividend Growth Index 8.0% lower compared to the Russell 2000’s 20.2% drop off.
ProShares also offers the ProShares Russell 2000 Dividend Growers ETF (BATS: SMDV) and the ProShares S&P MidCap 400 Dividend Aristocrats ETF (BATS: REGL) for those seeking quality dividend growers in the small- and mid-cap categories, respectively. REGL tracks the Dividend Aristocrats Index. The mid-cap Dividend Aristocrats Index, though, only requires 15 consecutive years of increased dividends for inclusion. SMDV, a dividend spin on the Russell 2000, the benchmark U.S. small-cap index, tracks the Russell 2000 Dividend Growth Index, which includes small-cap firms with dividend increase streaks of at least a decade.
Financial advisors who are interested in learning more about the dividend strategy can watch the webcast here on demand.