How You Can Beat the Market with Dividend Aristocrat ETFs
With stocks down across the board to start the year, many investors are scrambling to find better selections for today’s more uncertain market environment. While utilities and consumer staples are becoming more popular thanks to this sentiment, there are also non sector-specific ways to improve performance relative to the market.
One outperforming strategy has been to focus on higher quality dividend-paying companies. Stocks in this area haven’t seen incredible returns, but they have done far better than the broad market over the past few months. But not just any dividend-paying stock will do, as a focus on the so-called ‘dividend aristocrats’ should be a go-to strategy for investors in this market environment.
What is a Dividend Aristocrat?
A dividend aristocrat stock is a company that has a long track record of increasing dividend payments year-after-year. The number of years required varies depending on who you ask, but at least ten consecutive years of dividend increases is usually required to get into this select bunch.
A company that fits this bill is rare breed since it has been able to boost payments no matter what is happening in the broader economy. This shows an impressive ability to manage capital effectively, while also taking care of shareholders too (also read Time to Invest in Dividend Aristocrat ETFs?).
How to Invest
While you can find a few specific stocks that are in the dividend aristocracy, an easier way to play this trend might be with ETFs. There are actually a few funds tracking this corner of the market, and all have been outperforming the broad S&P 500 in this recent rough patch.
That’s right, the SPDR S&P Dividend ETF (SDY), the ProShares S&P 500 Aristocrats (NOBL), and the Vanguard Dividend Appreciation ETF ( VIG) have all easily outperformed SPY over the past three months, while the trio are also outperforming from a one year look as well (see 6 Quality Dividend ETFs for Safety and Income).
Clearly, a focus on quality has been the way to go in this uncertain market environment.
What’s The Difference?
While all three have managed to beat out broad markets, investors have to be wondering what are the key differences between the three main dividend aristocrat ETFs? Well, for the most part, the key difference is how exclusive of a club the funds make the aristocrats.
VIG is the least exclusive, as it allows companies to join its benchmark after raising dividends each year for at least one decade. SDY is the next in line with a similar policy, but for two decades, while NOBL is the most exclusive, only holding companies that have raised dividends every year for at least a quarter century.
As you might be able to guess, the higher the barrier to entry, the fewer the companies that pass the screen. As such, NOBL has the fewest number of securities at 50, followed by about 100 for SDY and roughly 175 for VIG (see 5 ETFs for Portfolio Safety and Diversification ).
All three do a pretty good job of spreading out assets, but actually VIG is the most concentrated thanks to its cap-weighted focus. Meanwhile, NOBL is the least concentrated thanks to its equal weighted focus which puts the same amount in each stock, while SDY takes a different approach, weighting by dividend yield. Either way, consumer and industrial stocks are top holdings in each of the three, while all of them have little in the energy sector, largely thanks to the recent sector downturn.
And while all three are extremely tradable, there are some expense differences to note as well. VIG is the cheapest—as is usually the case with Vanguard products—and comes in at 10 basis points a year compared to 35 for the other two. While none are really that expensive, it is certainly a big difference on a relative basis, and something to consider for cost-focused investors out there.
Key Caveat
While all three might have a dividend focus, it is important to remember that they zero in on companies that are growing dividends at a constant rate, not necessarily those that are paying out the most in terms of yield.
In fact, while all three beat out the broad market in terms of their 30-Day SEC yield, none top three percent either. So while they are modest income destinations, investors who are just seeking yield will likely be disappointed by the dividend aristocrat family (see 3 High Dividend ETFs to Beat the Volatile Market ).
Bottom Line
The dividend aristocrat space is often overlooked by investors in favor of ‘sexier’ or more enticing market segments. However, over the past few months, stability and rock solid companies have been in vogue instead.
This trend has allowed the dividend aristocrat ETFs of VIG, SDY, and NOBL to beat out the market and provide investors with a bit more stability in this uncertain time too. Just remember, none of these aristocrat funds are going to pay you a huge yield, but in turbulent economic times their outperformance makes the aristocrat funds the nobility of the investing world, and definitely worth consideration for your portfolio.
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VANGD-DIV APPRC (VIG): ETF Research Reports
SPDR-SP DIV ETF (SDY): ETF Research Reports
PRO-SP5 ARISTOC (NOBL): ETF Research Reports
SPDR-SP 500 TR (SPY): ETF Research Reports
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