Investors often turn to dividend stocks and exchange traded funds as avenues for reducing portfolio volatility, particular when broader market turbulence rises, but as 2018 proved, not all dividend-oriented strategies deliver the desired outcome of reduced volatility.
Against the backdrop of four interest rate hikes by the Federal Reserve last year, some high dividend funds languished. However, some dividend growth funds performed less poorly than the S&P 500. The ProShares S&P 500 Aristocrats ETF (CBOE: NOBL), which tracks the S&P 500 Dividend Aristocrats Index, was one of those funds. NOBL’s underlying index requires member firms to have minimum dividend increase streaks of 25 years.
The result is investors are left with a portfolio of high-quality, sustainable dividend payers as opposed to more high-yield focused funds that may contain companies on more precarious financial positions.
“2018 ended on a sour note for the S&P 500, as the index declined by more than 9% in December alone,” said S&P Dow Jones Indices in a recent note. “The drop-off resulted in the first negative calendar year return (-4.38%) for the S&P 500 (TR) since the financial crisis (2008). Meanwhile, the S&P 500 Dividend Aristocrats, which is designed to measure the performance of S&P 500 companies that have increased their dividends for the last 25 consecutive years, fared relatively better in 2018 but still ended in the red (-2.73%).”
Impressive Track Record
While NOBL is just over five years, its underlying index is nearly three decades old and the benchmark has a history of performing less poorly than the S&P 500 when the broader market declines.
“Since year-end 1989, there have been six calendar years of negative performance for the S&P 500—and in all six years, the S&P 500 Dividend Aristocrats outperformed the equity benchmark by an average of 13.28%. In fact, the S&P 500 Dividend Aristocrats produced a positive total return in three of those years,” according to S&P Dow Jones.
NOBL’s fourth-quarter performance indicates the ETF did outperform the S&P 500 as the broader market tumbled. From October 1, 2018 through November 23, 2018, NOBL fell 4.38%, meaning it outperformed the S&P 500 by 500 basis points over that period, according to ProShares data.
“Additionally, we observe that the average excess return over the S&P 500 was higher in the most negative months. Since 1989, the S&P 500 has lost 5% or more in 31 out of 348 months (~9% of the time). In these months, the average excess return for the S&P 500 Dividend Aristocrats was 2.46%, with a hit rate of 81%,” notes S&P Dow Jones.
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