Dividend Aristocrats: A Free Lunch?

07/01/2016 9:00 am EST

Focus: ETFs

Nicholas Vardy

Editor, Oxford Wealth Accelerator

2016 is proving to be a tough year to make money in US stocks; here, I discuss a strategy that generate consistent gains, even as the broader market treads water, suggests Nicholas Vardy, editor of The Alpha Investor Letter.

The “Dividend Aristocrats” investment strategy is based on the premise that buying large-cap stocks with decades-long track records of increased payouts will deliver total returns that exceed those of just buying the market.

To be a Dividend Aristocrat, a stock must meet two requirements:

First, it must be a member of the S&P 500. Second, it must have a history of at least 25 years of increasing annual dividends.

The current tally of S&P 500 companies that meet both of these requirements is 50.

Standard & Poor’s has been tracking the performance of these stocks since 2005 through the S&P Dividend Aristocrats Index; the index has outperformed the S&P 500, with lower volatility, since its inception.

And in what amounts to that ever elusive “free lunch” of higher returns with lower risk, the index tends to capture 90% of the upside of the S&P 500, while suffering only 70% of its drawdowns.

Although the strategy is old, the ProShares S&P 500 Dividend Aristocrats ETF (NOBL) is quite new, having launched only in October 2013.

Year to date, NOBL has posted a total return of (including dividends) 8.32%.  By way of comparison, the S&P 500 Index has delivered investors a total return of 2.55%.

With an expense ratio of just 0.35%, the cost to own the Aristocrats Index is more expensive than a standard S&P 500 Index fund.

But with the Dividend Aristocrats strategy outperforming both on an absolute and risk-adjusted basis, the higher management fee seems worth it.

Subscribe to The Alpha Investor Letter here…

By Nicholas Vardy, Editor of The Alpha Investor Letter

Related Articles on ETFs