Income investors can generate superior returns by buying high-quality dividend growth stocks and holding them for long periods of time. For example, the Dividend Aristocrats are a group of 64 stocks in the S&P 500 Index that have each increased their dividends for 25 consecutive years or longer. The Dividend Aristocrats collectively have outperformed the S&P 500 Index by 0.4% per year over the past decade.
- High Yield Dividend Stocks in Gurus' Portfolio
- NOBL). While we believe investors can generate even stronger returns by selectively buying individual Dividend Aristocrats, this is the only ETF that specifically tracks the Dividend Aristocrats. As a result, it is the best dividend ETF for 2020.
Exchange-traded funds have become increasingly popular in recent years. The ProShares S&P 500 Dividend Aristocrats is no exception. It has over $5 billion in assets under management. The shift in client funds from traditional mutual funds to ETFs has largely been driven by fees. Mutual funds typically charged high annual expense ratios of 1% or more. Many also had additional fees when making the initial fund purchase. By comparison, ETFs widely have much lower expense ratios. ProShares S&P 500 Dividend Aristocrats has an annual expense ratio of 0.35%.
ETFs are also more appealing because they trade all day, which provides greater liquidity than mutual funds, which are only priced once after the market close. ETFs are a lower-cost way for investors to generate the diversification that made mutual funds attractive. ETFs, like mutual funds, allow investors to purchase a basket of securities at once.
The ETF has a diversified portfolio, which aligns with the Dividend Aristocrats. It owns all of the Dividend Aristocrats, which totaled 57 at the end of 2019. There are seven new additions to the Dividend Aristocrats for 2020, meaning the fund will add to its portfolio holdings to reflect these additions. Holdings are equally weighted, instead of weighted by market capitalization. This means no individual stock will become too large within the portfolio, further reducing individual stock risk.
Why the Dividend Aristocrats?
We believe dividend growth investing is the best strategy to produce superior long-term returns. The evidence backs up this theory, as the Dividend Aristocrats have outperformed the S&P 500 Index over the past decade, with less volatility as well. According to ProShares, the Dividend Aristocrats have captured the vast majority of the S&P 500 Index's returns in previous bull markets, while avoiding some of the loss during downturns. In four of the past five worst downturns since inception, the Dividend Aristocrats outperformed the S&P 500 Index by an average of 4%.
The Dividend Aristocrats are a group of highly well-known companies, including Johnson & Johnson (NYSE:JNJ), Walmart (NYSE:WMT), Target (NYSE:TGT) and Chevron (NYSE:CVX). These are companies that sell products millions of people use every day, even during recessions. They collectively possess competitive advantages, such as strong brands and global scale, that allow them to stay on top of their industry. They also have growth potential to continue increasing their profits and dividends each year for many years, even during recessions.
If a market downturn occurs going forward, the Dividend Aristocrats are likely to continue outperforming. ProShares S&P 500 Dividend Aristocrats has a current dividend yield of approximately 2.5%, which is significantly higher than the yield of the broader market. Due to the nearly uninterrupted bull market in the past 10 years, the average yield of the S&P 500 Index is currently below 2%. Therefore, ProShares S&P 500 Dividend Aristocrats has virtually all of the best qualities of an ETF--an above-market yield, a relatively low expense ratio and diversification benefits. In addition, it is not as exposed to some of the more richly-valued sectors of the market, such as technology. Market sectors with elevated valuations could be hit the hardest in a recession.
Investors have many choices among exchange-traded funds. There are ETFs that correspond to virtually all asset classes, including bonds, currencies, commodities and equities. There are equity ETFs that cover all market sectors, and there are also inverse ETFs that allow investors to bet against a market sector or index. Finally, there are ETFs that provide exposure to every equity investing style, including growth ETFs, value ETFs, income ETFs and everything in between.
For income investors looking for instant allocation of high-quality dividend growth stocks, we recommend ProShares S&P 500 Dividend Aristocrats as the best dividend ETF. It provides instant ownership of all the Dividend Aristocrats at once. With a low expense ratio and high dividend yield, ProShares S&P 500 Dividend Aristocrats is the top ETF for dividend growth investors.
Disclosure: No positions in any stock mentioned.
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This article first appeared on GuruFocus.
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