The Dividend Aristocrats are fighting back.

The Dividend Aristocrats are S&P 500 companies that have increased their dividends each year, for at least 25 years running. That is an exclusive group. Companies that have increased their dividends for 50 years or more are dividend royalty – they are dividend kings. The Aristocrats have underperformed over the last year and more. You won’t find an Apple, or Amazon or Alphabet (Google) or Tesla in that index. That made it more than difficult to keep up with the market. But those high quality Aristocrats are fighting back as value takes over from growth in 2021. With few dramatic high flyers, that might be its greatest strength in 2021 and beyond.

There is a US listed ETF for the dividend aristocrats ProShares NOBL. Here’s an overview from their landing page.

Here’s my previous post on the US and Canadian Dividend Aristocrats.

Rising dividends and equal weight magic.

The Dividend Aristocrats offer a very simple one-two punch. We have that meaningful dividend growth history and the equal weighting of the index constituents. That compensates for a few of the key weaknesses of the S&P 500 cap weighted index. That is the most replicated index on earth, of course. A cap weighted index will follow the momentum of the market as more investors flow into the most popular stocks.

That can create a bubble based on enthusiasm over fundamentals.

Yes, you’ll find those cap weighted ETFs at work in the ETF Portfolio page. The methodology can work wonderfully until it doesn’t, such as in the dot-com crash of the early 2000’s. US stock markets and Canadian stock markets were crushed thanks largely to the over concentration in very popular tech stocks. Most of the US tech stocks had no earnings or very poor earnings. Of course, Canada went over the ledge thanks to Nortel. You can throw in the odd JDS Uniphase and a few other names as well.

You have a choice.

None of the those tech stocks would have qualified as a dividend aristocrat in the year 1999 or 2000. The index side stepped much of the carnage. The dividend aristocrats greatly outperformed the S&P 500 through the dot-com crash and well beyond. It is an investment approach that beats the market with less volatility.

The first column is year, then Aristocrats, S&P 500, and then differential.

Incredibly, we see the Aristocrats offer positive returns in 2000 and 2001 while the cap weighted S&P 500 is two years into its three year venture of delivering negative returns. That began the lost decade for US stocks.

Are we about to enter another lost decade?

Many or most market commentators will offer that US stocks are in a bubble, again. The PE ratios, CAPE ratio and Buffett indicator all place today’s US stock market in dot-com crash territory.

Shiller PE Ratio.

And from Mr. Buffett, and indicator that measures the stock market vs the economic output (GDP).

I’ve seen this movie before. I was in this movie (The dot-com crash), and those of us who were extras know how this ends. All said, we don’t know the running time of this disaster movie, ha.

Economist David Rosenberg has never been this excited to bet against the herd.

You will have to make up your own mind. I won’t tell you how to invest, I just put observations on the table. But we do have a choice.

• We can lessen our exposure to ‘over valued’ US stocks – if you share that opinion.
• We don’t have to invest in those over valued stocks.

There is also the option of ‘rolling the dice’ and selling some of those over valued stocks along the way in 2021 and perhaps beyond. There is a chance (perhaps a good chance) that the run for US stocks will continue, though the growth stocks have recently been underperforming.

Other US stock investment options.

Unfortunately there is no Canadian dollar US Dividend Aristocrats ETF. For US accounts you could certainly use that NOBL if you like the idea of Aristocrats.

Here’s a great post on Seeking Alpha comparing the recent performance of the Aristocrats vs the market. Here’s the sector allocation for the month of March and the contributions to outperformance or underperformance.

Here’s the performance of the NOBL ETF from inception in 2014.

Here’s the top sector weightings. As The Sunday Investor demonstrated, our returns are largely dependent upon sector selection or allocation, not stock selection.

Given that there is no CAD version for the Aristocrats, you might select a basket of individual stocks from the index. For our US stock portfolio I have skimmed from the Dividend Appreciation ETF (mentioned below). Within that grouping we do hold ten Aristocrats.

A close but not so close option is to use the Dividend Appreciation index ETFs that you’ll find on the Vanguard Canada page. The Appreciation index demands 10 years of dividend growth. The index also applies financial health screens. And that said, it is not much ‘cheaper’ than the market.

You might consider a mid cap or small cap fund, or a US quality fund such as this offering from iShares Canada. There is also the BMO US Dividend offering.

All said, they may be inferior choices compared to holding that NOBL or buying a dozen or more of the Aristocrats. I think it is a massive ETF hole in Canada to not have a Canadian dollar US Dividend Aristocrat ETF. Hopefully that hole will get filled one day soon.

A very simple US Dollar option is the equal weight S&P 500 ETF from Invesco.

Enter the retirement risk zone.

All of the above may not be of much (or as much) concern to you if you are early in the accumulation stage. When there is a correction, you can simply add at those lower prices. And of course, lower prices are good. If you are young, you should cheer for a real stock market correction so that you can buy those lower prices, and take advantage of a market valuation reset.

It’s a different story for those of us who are in the retirement risk zone, or who are already retired. Poor stock market returns could impair our retirement.

While the valuation ratios can’t predict the timing of stock market corrections, they are a reasonably accurate measure of future returns. The US market is likely to deliver very modest or no real (inflation adjusted) returns over the next several years or decade. That may factor in to your retirement planning as well.

Canadian, International developed and developing markets do not suffer from that US level of ‘richness’.

I have trimmed some of our US high flyers. I have set limit sell trades for the next round of profit harvesting. Those monies will be moved to the risk off assets such as bonds, commodities, cash and bitcoin should bitcoin see a correction.

We enjoyed some drastic outperformance over the US market through the pandemic.

For portfolio and asset allocation ideas please have a read of the new balanced portfolio.

For the importance of taking economic shifts into consideration, here’s The Permanent Portfolio.

Share your ideas on US stocks.

I need to do more digging. But it appears difficult to find an approach that would match the Aristocrats. Even the US value funds or low volatility funds have an aggressive allocation to the technology sector.

If you were looking to still invest in US stocks, but wanted to potentially side step any over valuation, where would you turn? Are you concerned about the possibility of a major market correction?

Please offer up those ideas in the comment section.

Thanks for reading. Thanks in advance for your input.

Reader idea: iShares US Dividend Growers – CUD (CAD Hedged). That is a “higher yield” approach that insists on a 20-year dividend growth history. You will not find the usual tech suspects on the holdings page. That said, 2.0% passes for high yield in the US these days, as so many stocks have been elevated.

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