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Summary
- Dividend Aristocrats, companies with long histories of paying consistently rising dividends, have tended to outperform over the business cycle.
- The long-run outperformance of these stocks has tended to occur in market sell-offs when the defensive nature of these companies business models leads to relative gains.
- In the broad-based sell-off that has occurred over the last 3 months, the outperformance has been relatively modest.
- This article details the performance of the Dividend Aristocrats in the S&P 500.
The Dividend Aristocrats (BATS:NOBL) - S&P 500 constituents that have paid increased dividends for twenty-five consecutive years - have historically been a defensive trade during market sell-offs. In the five years with negative total returns for the S&P 500 since 1990, the Dividend Aristocrats have outperformed in each year.
That has been the case again in 2018, the Dividend Aristocrats have outperformed the broad market by 2% as charted below.
Source: Bloomberg
That level of outperformance is small relative to previous equity market sell-offs of this magnitude. In the other three years in this sample period with double digit declines for the S&P 500 - 2001, 2002, and 2008 - the Dividend Aristocrats have outperformed the broad market by double digit percentages.
Part of the smaller relative outperformance could be driven by the fact that despite the recent rally, interest rates are still notably higher on the year. While the 10-yr Treasury yield is 50bp off its early November high of 3.24%, it is still about 40bp higher than where we started the year. The Dividend Aristocrats tend to be more interest rate sensitive than the rest of the equity market as their steady payout gives them more fixed income-like characteristics.
As I noted in , the distribution of the recent market move has been highly correlated. Dividend Aristocrats could be getting sold with the rest of the market as more investors use passive vehicles. This could provide opportunities for discerning dividend-focused investors.
In this article, I will list for readers the performance of all of the Dividend Aristocrats since the market peak on September 20th. The list is sorted in ascending order by the return since that date in the second-to-last column in the table below.
Of the 53 companies on the list, only 4 - Hormel Foods (HRL), Procter & Gamble (PCG), McCormick & Co (MKC) and McDonald's (MCD) have produced positive returns. Thirty-seven companies have produced a total return of -10% or worse; nineteen companies are down more than 20%; water heater maker A.O. Smith (AOS) is down more than 30%.
With the equity market falling sharply, some investors may be looking for defensive plays that further limit downside risk, but retain some upside if the market rebounds. In "Dividend Payments and Stock Price Crash Risk," authored by Jeong-Bon Kim of University of Waterloo, Le Luo of Huazhong University of Science and Technology, and Hong Xie of the University of Kentucky, the authors demonstrated the negative correlation between dividend payments and stock price crashes. Poor managers can not only risk a company's ability to pay dividends but also expose a company to financial ruin. The paper suggested that a firm's commitment to dividend payments reduces agency costs and lowers the risk of large-scale stock price drops.
Dividend stocks outperform non-dividend paying stocks over time, but the highest yielding stocks can occasionally be value traps that fail to pay sustainable dividends to investors. Hopefully, Seeking Alpha readers understand the need to ignore the siren song of simply buying stocks based on yield alone. Historically, that strategy has also underperformed; buying stocks with sustainable dividend yields has generated better long-run performance with lower risk. What better way to demonstrate dividend sustainability than to pay increasing dividends for multiple business cycles. Investing in the Dividend Aristocrats in not a particularly high dividend strategy, but owning the underlying companies has delivered risk-adjusted outperformance over time. With markets under pressure, and the Dividend Aristocrats just marginally outperforming, this list could prove valuable to dividend-focused investors looking for opportunities.
Disclaimer: My articles may contain statements and projections that are forward-looking in nature, and therefore inherently subject to numerous risks, uncertainties and assumptions. While my articles focus on generating long-term risk-adjusted returns, investment decisions necessarily involve the risk of loss of principal. Individual investor circ*mstances vary significantly, and information gleaned from my articles should be applied to your own unique investment situation, objectives, risk tolerance, and investment horizon.
This article was written by
Ploutos
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Institutional investment manager authoring on a variety of topics that pique my interest, and could further discourse in this online community. I hold an MBA from the University of Chicago, and have earned the CFA designation. My articles may contain statements and projections that are forward-looking in nature, and therefore inherently subject to numerous risks, uncertainties and assumptions. While my articles focus on generating long-term risk-adjusted returns, investment decisions necessarily involve the risk of loss of principal. Individual investor circ*mstances vary significantly, and information gleaned from my articles should be applied to your own unique investment situation, objectives, risk tolerance, and investment horizon.
Analyst’s Disclosure: I am/we are long NOBL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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