The 3 Best ETFs that Invest in Dividend Aristocrats

12/28/2018 5:00 am EST

Focus: FUNDS

Ned Piplovic

Assistant Editor, Eagle Financial Publications

Dividend Aristocrats are a group of S&P 500 stocks that have boosted their annual dividend payouts for at least 25 consecutive years and whose individual market cap exceeds $3 billion, explains income expert Ned Piplovic, editor of DividendInvestor.

Investors can take positions in a selection of individual Dividend Aristocrats stocks. Alternatively, investors can simply buy into one or two Dividend Aristocrats ETFs.

Some of these Dividend Aristocrats ETFs only track the performance of the 53 Dividend Aristocrats companies. Other Dividend Aristocrats ETFs track the performance of other high-yield stocks in addition to the Dividend Aristocrats.

The following three funds are currently the best Dividend Aristocrats ETFs, with three distinctive approaches to generating higher-than average dividend income

S&P 500 Dividend Aristocrats ETF (NOBL)

This ETF is the only fund in this group that focuses exclusively on the S&P 500 Dividend Aristocrats. Since its inception in 2013, the fund has outperformed the overall S&P 500 growth with lower volatility. As of December 17, 2018, the fund had nearly all of its $3.6 billion in total assets spread across the 53 Dividend Aristocrats and 0.25% in cash.

The asset distribution is fairly even across the holdings. The share of total assets ranges from a low of 1.48% for the Target Corporation (TGT), to a high of 2.06% for the Kimberly-Clark Corporation (KMB), with a 1.88% average share across the entire fund. The top 10 holdings account for only 20.14% which is only slightly higher than the 17.21% combined share of the bottom 10 holdings — excluding cash.

Since this ETF holds only companies that raise their annual dividend payouts every year, it is logical that the it increased its dividend distribution every year since its inception in October 2013. Over the past five years, the fund’s total annual dividend distribution advanced 150%, which corresponds to an average annual growth rate of nearly 20%.

The fund paid a total annual dividend of $1.39 for 2018, which is equivalent to a 2.3% yield. The fund’s total dividends for 2018 were unable to offset the sharp share-price decline in early December 2018. The fund delivered a total loss of 1.2% for the trailing 12 months.

However, the Dividend Aristocrats deliver returns over the long term. Analogously, this fund’s performance over the extended horizon fares much better with a three-year total return of 32% and a five-year total return of nearly 56%.

SPDR S&P Dividend ETF (SDY)

This ETF tracks the performance of the S&P High Yield Dividend Aristocrats Index. As of December 17, 2018, the fund had $15.7 billion of total assets spread across 111 individual holding. The holdings include the 53 Dividend Aristocrats and additional high-dividend income companies.

The underlying index includes more holdings than the core 53 Dividend Aristocrats, because the index expands the consecutive annual hikes minimum threshold from 25 to 20 years.

The fund is well-diversified and closely mirrors the asset shares of the underlying index. The Dividend Aristocrat with the highest yield — AT&T Inc. (T) — accounts for a 2.34% share of the fund’s total assets. The top 10 holdings by share of assets make up slightly more than 17% of the fund’s assets. The top 38 holdings account for half of the fund’s assets.

The ETF collects dividend distributions of its holdings and passes through those payouts to the fund’s stockholders. The three-year total return is 32% and the five-year total return is nearly 51%, with almost half of those returns originating from dividend distributions.

CBOE Vest S&P 500 Dividend Aristocrats Target Income ETF (KNG)

Conventional income investors generally must choose between high dividend stocks that historically have delivered lower total returns with higher volatility and companies with lower dividend yields with steady dividend increases that deliver higher-than-average total returns and lower volatility.

This ETF — which track the price and yield performance, before fees and expenses, of the CBOE S&P 500 Dividend Aristocrats Target Income Index Monthly Serie — aims to eliminate this apparent dilemma by selecting the higher quality dividend grower stocks and selling call options on some of the stock holdings to generate additional income.

The fund seeks the additional income from options premiums by converting a portion of each stock’s potential growth into current income.

To execute this strategy, the fund’s managers compare the stock portfolio’s dividend-generated income to the overall income and seek to bridge any gaps with call option premiums on a portion of each holding. While limited to a maximum of 20% of each holding, the share of holdings against which the fund sold call options generally range from 8% to 11%. The average term of each call options is one month.

The fund's most recent distribution converts to a $1.856 annualized payout and a 4.6% dividend yield. Including the two rounds of dividend distributions, the fund’s total return to date is 3.44%.

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