eResearch | An Investing Daily article authored by Scott Chan strongly promotes the inclusion of dividend stocks in investor portfolios, and particularly in times of recession possibilities. Dividend companies with high pay-outs tend to be larger mature companies that generate growing revenues and increasing earnings to finance their dividend payment policy.
Dividend-paying companies tend to do better, relatively, in falling markets. Although not exactly recession-resistant, dividend stocks are certainly less volatile than their growth-oriented “cousins”.
Beware Exceptionally High Yields
A high yield on its own is not a reason to buy a stock. An investor needs to analyze the company’s history of earnings and dividend payments to ascertain whether the high yield could be vulnerable to a dreaded dividend cut. Sorting through reams and reams of company financials would be a daunting task, and one that is well beyond the capability of the average investor. Enter the Dividend Aristocrats Index.
Dividend Aristocrats Index
The S&P Dividend Aristocrats Index currently consists of 57 stocks taken from the 500 Index. The sole criterion is that, to qualify to be an “Aristocrat”, the company must have increased its annual dividend payment for at least 25 consecutive years. To accomplish that feat is an impressive achievement. It means that every one of the 57 companies increased their dividend even during the recession of 2008-2010.
The current yield on the Dividend Aristocrats Index is 2.6% which, while not exactly barn-burning, beats the current yield on the S&P 500 Index of 1.8%.
Comparing the Aristocrats to the 500 Index
The following chart compares total returns, with dividends reinvested, over the past ten years of the Dividend Aristocrats Index versus the S&P 500 Index. In that time-frame, the Dividend Aristocrats out-performed the 500 Index by 302% to 261%.
The following table shows the returns for the two Indexes over 1, 3, 5, and 10 years. Only over the last 3-year period, when the FAANG stocks rocketed upwards, did the Aristocrats not out-perform the 500 Index.
How to Invest in the Dividends Aristocrats Index
One ETF that tracks the D.A. Index is the ProShares S&P 500 Dividend Aristocrats (NOBL, with a current yield of 1.9%). Another is the S&P High-Yield Dividend Aristocrats Index (SPHYDA).
Alternatively, analyze the D.A. Index itself and pick those stocks that seem appealing. After all, every one has proven itself during good times and bad.
To read the entire Investing Daily article, click here: Dividend Aristocrats
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NOTE: The following is not part of the Investing Daily article.
The Canadian Dividend Aristocrats Index
The Canadian ETF is the iShares S&P/TSX Canadian Dividend Aristocrats Index with symbol CDZ and a current yield of 4.0% with a monthly pay-out.
This ETF provides a diversified exposure to a portfolio of high-quality Canadian dividend-paying companies that have increased their annual dividend payments for at least 5 consecutive years.
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