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THE RATIONAL INVESTOR: Are those 'Dividend Aristocrats' the ideal investments?

Sarasota Herald-Tribune logo Sarasota Herald-Tribune 5/31/2021 Robert Stepleman
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Investors are always looking for stocks that have a solid chance of providing good returns without a significant probability of an irrecoverable loss like a long-term price collapse or outright bankruptcy. In a past column I showed a diversified portfolio of high-quality stocks have the potential to be that. However, many investors require dividends and many high-quality stocks choose to reinvest their profits to grow earnings rather than pay dividends. Thus, for those investors, another possible choice is a diversified portfolio focused on the “Dividend Aristocrats.”

Recall the Dividend Aristocrats are stocks in the S&P 500 that have raised their dividends every year for at least the past 25 years. Recently, there were 65. While some of these stocks aren’t high-quality as defined by Standard & Poor’s, they do generally avoid bankruptcy and have historically performed well.

Recently, year-to-date performance of the ProShares ETF (NOBL) that tracks these stocks was ahead 13%. Over the last 20 years they outperformed the S&P 500 about half the time. Looking even longer-term, over the past three decades, the Dividend Aristocrats have outperformed the S&P 500 by about 1.7 percentage points per year.

They rarely underperformed significantly. For example, in a bad year like 2018, while they had a negative return, it was about half of the S&P 500’s. Sometimes the Dividend Aristocrats did much better; in 2011 the total return of the S&P 500 was 1.5% and the Dividend Aristocrats 8.3%. Unfortunately, over the more recent one-, three- and five-year periods, they underperformed. This was particularly evident in their performance for 2020 where they lagged by over 9 percentage points.

Their risk as measured by their standard deviation (a measure of volatility) tends to be a little lower than the S&P 500’s but not significantly. This may be an issue for investors sensitive to volatility.

Another issue is that the Dividend Aristocrats are all large-capitalization stocks because they are in the S&P 500. Large-cap stocks don’t have a monopoly on stocks that have long histories of increasing dividends. There are mid-cap and even small-cap stocks that have such histories; some even raising dividends for 50 years.

While not all the Dividend Aristocrats are high quality, they tend to outperform at least partly because many of them are. However, all may not be equally attractive; it’s important to do further screening.

Investors should look at such critical measures as each candidate’s S&P stock rating, S&P bond rating, and Value Line timeliness and safety ratings. In the best of all possible worlds, investors would want an S&P rating of at least A- on the stock and bonds, as well as Value Line timeliness and safety ratings of 1 or 2. For investors primarily interested in income, they may want to look for those that have dividends significantly higher than the S&P 500’s 1.4%, and with payout ratios no more than 50%.

Investors should keep in mind there is no “free lunch” on Wall Street. Every class of investments has pros and cons. Due diligence before purchasing any investment is essential.

All data and forecasts are for illustrative purposes only and not an inducement to buy or sell any security. Past performance is not indicative of future results. If you have a financial issue that you would like to see discussed in this column or have other comments or questions, Robert Stepleman can be reached c/o Dow Wealth Management, 8205 Nature’s Way, Lakewood Ranch, FL 34202 or at He offers advisory services through Bolton Global Asset Management, an SEC-registered investment adviser and is associated Dow Wealth Management, LLC.

This article originally appeared on Sarasota Herald-Tribune: THE RATIONAL INVESTOR: Are those 'Dividend Aristocrats' the ideal investments?


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