The Dividend Aristocrats may form the bedrock of dividend growth investing in the US. Many investors trust the divining rod of a meaningful dividend growth history. It takes an incredibly successful company to make its way into the venerable S&P 500 index. For a company to then be able to increase its dividend every year for 25 years or more puts that company in well, exalted company.
That’s why they call them The Aristocrats. If you want to reach royalty, you increase your dividend for 50 years or more and they call you a Dividend King.
In Canada, we have much lower dividend expectations. Companies only need to increase their dividend for 5 years or more to be eligible for that Dividend Aristocrat status.
The US Dividend Aristocrats
Here’s the link to the Dividend Aristocrat Index page. On that site you can read more on the methodology, you can track the returns and keep an eye on the index constituents. You’ll notice that the US Aristocrats beat the parent index, the S&P 500 through the last market cycle. They beat ‘the market’ and do so with less volatility and a lesser drawdown through the last recession and major market correction.
And that is the appeal of investing in these Aristocrats – better risk adjusted returns. That outright market beat is certainly a ‘bonus’. And as always past performance does not guarantee future returns. Here’s a ‘longer’ term chart for the Aristocrats vs the S&P 500.
The magic is in that stability or ability to hold up better (much better) than the market during market corrections. For example here are the returns by year of The Aristocrats vs the S&P 500. As you may know the US market fell for 3 years in a row, from 2000 through to 2002. The Aristocrats actually had positive returns in 2 of those years.
The 2nd column is The Aristocrats, the 3rd column is the S&P 500, the 4th column is the performance differential. You’ll see that the Aristocrats did their thing in the financial crisis as well, in 2008.
Scan through the constituents list and take a look at the sector breakdown and you’ll see that the index is dominated by consumer staples and consumer discretionary. You’ll see many household names on the list of companies. You’ll also find some not-so-familiar names, but names that Dividend Aristocrat investors know intimately.
The Dividend Aristocrats on Sure Dividend
Many investors go a step further and analyze the companies in search of even greater returns or dividend and company health. The most popular resource might be the Sure Dividend site. Ben Reynolds and his team analyze and rate all of the Aristocrats. Here’s some wonderful background and charts on historical Aristocrat performance and you’ll also find the current list of 57 US Dividend Aristocrats.
You can certainly skim enough of ’em as I like to write, you can also do your own additional research in the attempt to boost returns or find greater stability, or you can buy the index by way of ProShares ETF, ticker NOBL. That is a US dollar listed fund.
Launched in 2013 that fund now has a 5-year plus performance history.
And as I had pointed out in this Seeking Alpha article, the Aristocrats are (curiously) beating the market in the bull run from 2009. That’s curious as the Aristocrat index offers virtually no tech exposure and the growth oriented names that have been contributing greatly to the generous returns of the S&P 500. That said there is obviously enough growth within the holdings of the Aristocrat index. It’s not all boring stuff such as the Colgate Palmolive’s and Walmart’s and Pepsi’s and Lowe’s and Procter and Gamble’s.
On the site Ben offers …
There is nothing magical about the Dividend Aristocrats. They are ‘just’ a collection of high quality shareholder friendly businesses that have strong competitive advantages. Purchasing this type of business at fair or better prices and holding for the long-run will likely result in favorable long-term performance. You have a choice in what type of business you buy into. You can buy into the mediocre, or the excellent.
Of course Ben ‘leans’ more toward further evaluation compared to buying the index fund.
How do Canadians invest in US Aristocrats?
Again, you can use that US listed NOBL, but to my knowledge there is no Canadian dollar equivalent. Of course for NOBL you might use your US dollar RRSP and US dollar taxable accounts. I have no issue with that in US Tax Free, though you will lose out due to the withholding taxes. You might allow diversification and asset allocation to trump ‘minor’ tax matters.
The closest you might get to the US Dividend Aristocrats is by way of Dividend Achiever Index Funds. That index insists on a minimum 10 year history of dividend growth. That smart beta fund also applies dividend health screens. That fund will certainly include many Dividend Aristocrats, but the difference is dividend growth history is obviously very meaningful.
Once again those funds might get close to the risk and return profile of the Aristocrats but there are obvious and major differences. If you’re comfortable holding individual stocks you might simply skim enough of ’em. Many would suggest that you hold 20-25 companies to capture an index. You might get some help from a site such as Sure Dividend. You might also pay attention to sector allocation and diversification.
My Seeking Alpha readers will know that I skimmed 15 of the largest cap Dividend Achievers in early 2015. Those 15 holdings mostly track the total index. I have a slight outperformance record thanks to letting the winners run.
Those Canadian Dividend Aristocrats
I’ll be back with a look at those Canucks that have delivered better risk adjusted returns compared to the TSX Composite. If you want to study-up, here’s the link to iShares ETF CUD.
Thanks for reading. Of course this article is not a recommendation. Read. Decide. Invest. And always understand and know your tolerance for risk. You might also invest in some advice from a trusted financial planner.
Don’t forget to help the cause and hit those social media share buttons. You can read my latest Seeking Alpha effort that hopefully will be a courtesy reality check for those who seek that FIRE – Financial Independence “Retire” Early. How much would it REALLY take?
Happy investing, Dale