Dividend stocks that have been growing in recent years—market favorites—have been getting less respect lately. It might be time to give them another look.
Equally weighted
ProShares S&P 500 Dividend Aristocrats
The exchange-traded fund (ticker: NOBL ), a good proxy for these stocks, has returned about 5% this year, including dividends. This is significantly lower than the 18% result for the broader market.
Many other ETFs that emphasize growing dividends — often the hallmark of trusted companies — have had similar results.
“We’ve seen this big swing into technology and growth stocks,” said Keith Lerner, associate chief investment officer of Truist Advisory Services. Those stocks often come with no or minimal returns.
Rising bond yields have hurt, providing an obvious option for income hunters. After a decade of depression, bond yields have rebounded nicely. The Federal Open Market Committee has raised short-term interest rates sharply from March 2022, raising yields as it fights inflation.
The 10-year US Treasury was recently yielding about 4.3%, compared to early 2022.
S&P 500
The index yield, by contrast, was 1.5 percent recently.
Bottom line: There is a lot of competition for dividend stocks.
66 S&P 500 Dividend Aristocrats Include Domestic Blue-Chip Names
Johnson and Johnson
(JNJ),
Proctor and gambling
(PG) and
Caterpillar
(CAT) These and other companies in the index have paid high dividends for at least 25 consecutive years, a testament to their strong business models.
But the index’s sector composition has been weighed on performance in 2023. Information technology only accounts for 3% of the index. of
Technology selection sector
The ETF (XLK), meanwhile, has returned 40% this year.
And one of Aristocrat’s biggest weightings are the main consumers, about 24%. These stocks are down an average of 3%.
Lerner pointed to weakness in the so-called “healthcare and utilities sectors—bond proxies.” The healthcare sector has returned less than 2%, and utilities have lost about 11% year to date.
| ETF / ticket | 3-month return | YTD return | Come back in 2022 | 3-year return | 5-year return |
|---|---|---|---|---|---|
| ProShares S & P 500 Dividend Aristocrats / NOBL | 3.8% | 4.6% | -6.5% | 10.5% | 9.2% |
| SPDR S&P 500 ETF Trust / SPY | 5.6 | 18.4 | -18.2 | 11.1 | 11.1 |
Note: It will be back by September 5th. Three and five year returns are annualized.
Source: Morningstar
Not all aristocrats did well this year. Caterpillar rose 18%, for example, and
Sherwin-Williams
( SHW ) gained 13%.
The S&P 500, unlike the Aristocrats, benefited handsomely from the Magnificent Seven:
Tesla
(TSLA),
Nivea
(NVDA),
Apple
(APL)
Amazon.com
(AMZN),
Microsoft
(MSFT),
Meta forums
(META) and
Alphabet
(GOOGL) As of Aug. 31, those stocks accounted for 71.5 percent of the S&P 500’s year-to-date returns, according to S&P Dow Jones Indices.
None of those stocks are among the S&P 500 Dividend Aristocrats, though, and many don’t even pay dividends.
“Most of the performance was really driven by very small stocks,” said Pimco portfolio manager Erin Brown.
It might be a good time to start picking up some quality stocks. For example, Caterpillar’s current year’s revenue is 14 times lower than last year’s 17 times. Artists and the like “provide good value for long-horizon portfolios,” says Brown.
“These stocks are going to do well — and they’re going to really show their curves and show their results — around where we’re starting to sell at lower prices and certainly the Fed is going to start lowering rates.”
That’s not the case now, but as we move into 2024, there are still signs of a slight slowdown in the economy, so an allocation to stocks is worth considering, Lerner says. “It might be better if we start seeing a bigger crack in the economy,” Aristocrats added.
These stocks are clearly protective. With everything that has happened this year, including the regional-bank crisis, it is easy to forget the performance of the aristocrats last year. The group had a 6.5% return, minus 18% for the S&P 500. Aristocrats have provided some shelter from the bond market’s double-digit losses in many asset classes.
Simon Hyman, global investment strategist at ProShares, says the quality of Aristocrats can be seen in a number of ways. One is their long-term track record of dividend increases, a sign of financial stability and strong cash flow generation.
Hyman said S&P 500 earnings fell nearly 6% year-over-year in the second quarter, but Aristocrats earnings rose an average of 10%, according to Bloomberg data.
“Ability [of the Aristocrats] “To be able to grow those revenues in a downturn in revenue and to be able to offset that downturn without using a lot of capital is a tangible benefit of quality,” he said.
There are other options for investors who want exposure to these stocks.
It is one of them.
Vanguard Dividend Appreciation
An ETF (VIG) that aims to track the S&P US Dividend Growers Index.
The composition of the ETF is very different from that of the S&P 500 Dividend Aristocrats. It recently had 314 holdings, which is much larger than Aristocrats, and recently one of the largest sector weights was technology at 19%. Its holdings include Apple and Microsoft.
The $69 billion fund, with an expense ratio of 0.06%, returned 7.9% this year.
There is also $24 billion.
iShares Core Dividend Growth
ETF (DGRO). It returned 4% this year; The expense ratio is 0.08%. The fund’s roughly 430 holdings include Exxon-Mobil (XOM).
ABV
(ABBV) and
Home Depot
(HD)
These are reliable names, although not very attractive to the wider market right now, and their parts should be reliable and grow.
Write Lawrence C Strauss at [email protected]
