The term aristocrat is usually associated with snobbery and status.
In the context of dividends, it’s a lot more down to earth and benevolent. The S&P 500 Dividend Aristocrats have boosted their payouts for at least 25 straight years—a bar that usually reflects solid, durable underlying profit growth for a company.
For retail investors, buying all 53 of the S&P 500 Dividend Aristocrats can be cumbersome and expensive. But there are exchange-traded funds that can help investors that have this income bent. The accompanying table includes three such funds.
“With these kinds of ETFs, you get the benefit of consistent and growing income generation, but there is more of a slant toward companies that have good growth prospects as opposed to just attractive dividend yields,” says Todd Rosenbluth, director of fund research at CFRA.
As this column has pointed out, chasing yield for the sake of it can lead to bad results.
One fund option is the $3.9 billion ProShares S&P 500 Dividend Aristocrats ETF (NOBL), which tracks the S&P 500 Aristocrats.
There are a few things investors need to be aware of in looking at this fund. The index the fund tracks is equal weighted, not by market capitalization, and no single sector can make up more than 30% of the index. The index is rebalanced four times a year.
And because admission to the S&P 500 Aristocrats requires at least 25 years of consecutive dividend hikes, certain sectors that are important in today’s market are underrepresented. That includes information technology, which as of Dec. 31 accounted for only 1.8% of the ETF’s portfolio.
Although many legacy technology companies do pay dividends, those payouts don’t always go back a quarter of a century. Microsoft (MSFT) launched its dividend in 2003, Cisco Systems (CSCO) in 2011, and Apple (AAPL) in 2012, for example.
The two largest sectors in the fund recently were consumer staples (23.2%) and industrials 21.8%.
Another option is the $17.2 billion SPDR S&P Dividend ETF (SDY). Culled from the multi-cap S&P 1500, this fund has about 110 holdings. Admission requires at least 20 straight years of dividend hikes, along with membership in the S&P 1500.
The fund skews to smaller companies, with a median market capitalization of about $14.8 billion. Its weightings differ considerably from those of the S&P 500 Dividend Aristocrats. Utilities, for example, account for nearly 11% of the fund, compared with about 2% among the S&P 500 Aristocrats, and its biggest sector concentration is in financials at 16.1%.
That includes Old Republic International (ORI), an insurance company with a market capitalization of about $6 billion. It yields 3.9%.
Relying on yield to weight holdings “results in a tilt toward smaller-cap and value stocks,” according to a Morningstar note.
CFRA’s Rosenbluth noted recently that these two funds “are part of the dividend ETF universe that looks at historical dividend growth records.”
A third entrant with a somewhat similar approach is the $30.6 billion Vanguard Dividend Appreciation ETF (VIG). The ETF tracks the Nasdaq U.S. Dividend Achievers Select Index, which consists of companies with at least 10 consecutive years of increasing their regular annual dividends.
As of Dec. 31, Microsoft was its biggest holding at 4.5% of the fund, followed by Walmart (WMT) at 4.3%, and Johnson & Johnson (JNJ) at 4.1%, according to Morningstar.
Technology stocks recently accounted for 9% of the fund, much higher than the nearly 2% for the S&P 500 Dividend Aristocrats. It also illustrates how requiring 10 straight years of dividend hikes rather than 20 or even more impacts the portfolio’s composition. Industrials accounted for 30.6%, by far the largest sector weighting.
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