Quality and dependability are the names of the dividend game, particularly this year when so many S&P 500 companies are disappointing investors with payout cuts or suspensions. The ProShares S&P 500 Aristocrats ETF (CBOE: NOBL) is one way investors can tap the dependable quality theme.
NOBL tracks the S&P 500 Dividend Aristocrats Index, targets the cream of the crop, only selecting components that have increased their dividends for at least 25 consecutive years. Consequently, investors are left with a portfolio of high-quality, sustainable dividend payers.
Making NOBL all the more appealing in the current environment is that investors don’t have to pay up for the privilege for accessing this basket of steady dividend payers.
“These quality companies tend to have stable earnings, strong balance sheets and durable business models—attributes arguably more important than ever. Furthering their appeal, these companies are now available at price-to-book valuation levels consistent with their long-term averages,” according to ProShares research.
NOBL ETF Perks
Energy and real estate are two of the worst dividend offending sectors this year, but NOBL allocates just over 7% of its weight to those groups. Fortunately, the fund’s energy holdings haven’t been dividend cutters, at least not yet. Rather, Exxon and Chevron merely appear unlikely to boost payouts this year. NOBL is also attractively valued relative to the broader market.
“The S&P 500 Dividend Aristocrats Index has been consistently performing at its average. Conversely, we can see that at 3.5 times current book value the S&P 500 is trading at levels well above recent averages of 2.7 times and seems to confirm the notion of an expensive market,” according to ProShares. “Growth stocks, the market’s darlings of recent times, are sporting a price-to-book of 7.4x, the most expensive levels since the halcyon days of the tech bubble.”
Importantly and highly relevant today, NOBL is not a high dividend strategy. When sorting by dividend yield: companies in the highest quintile of dividend yield – those whose ability to pay may become stretched in challenging markets – account for more than double the number of dividend cuts and eliminations versus those in the bottom quintile with more modest dividend yields
“A quality dividend growth strategy like the S&P 500 Dividend Aristocrats typically trades at a premium relative to the market. This is fairly intuitive: Over time, investors have been willing to pay a premium for quality companies that have had attributes like more stable earnings, better returns on equity, and a growing dividend of at least 25 consecutive years. However, today’s valuation indicates that not only is quality dividend growth on sale relative to the broad market—a relatively rare phenomenon—but it is also trading at exactly spot on the average level dating back to 2008,” according to ProShares.
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