The Dividend Aristocrat Index (NOBL) posted a respectable 4.02% total return in August, but again lagged the broad S&P 500 (SPY) as the increasingly tech heavy market benchmark powered higher. The move pushes the Dividend Aristocrat Index close to flat on the year (-1.2%) while the S&P 500 is now up close to 10% (9.7%). This underperformance in the tech-driven rebound has lessened the long-term outperformance of the strategy versus the cap-weighted benchmark. Over the last thirty-plus years, the dividend growth strategy has bested the broad market index by 1.7% per year.
Looking at the first decade of this three decade dataset via the cumulative return series above, and one may have drawn the incorrect conclusion that the Dividend Growth index was destined to underperform as the tech bubble inflated in the late 1990s. Much of the 2020 underperformance is again due to the underweight to high-flying tech. Not coincidentally, the Dividend Aristocrat Index is on pace for its worst year of underperformance versus the broad market since 1998 and 1999.
If you believe in a strategy, you have to believe in it through multiple business cycles, and I continue to believe that an equal-weighted portfolio of the companies that have the ability to increase shareholder payouts over economic cycles will generate long-run outperformance.
In the table below, the list of the current Dividend Aristocrat constituents is sorted descending by indicated dividend yield, and lists total returns, including reinvested dividends, over trailing 1-, 3-, 6-, and 12-month periods.
- In a strong month for risky assets, gainers outpaced losers by 4.5x to 1 (54 vs. 12).
- Retailers Target (TGT) – the top performer, Lowe’s (LOW), WalMart (WMT), and restaurant chain McDonald’s (MCD) were all in the top quartile of performers on the month. Strong returns from these retailers pushed the Consumer Discretionary portion of the Dividend Aristocrat Index to a 9.5% gain on the month. To illustrate how difficult it has been for the Dividend Aristocrats to keep pace with the tech giants in this rally, that 9.5% return just equaled the 9.5% of the broader Consumer Discretionary sector in the S&P 500, which was powered higher alongside Amazon (AMZN), which now makes up over 40% of the capitalization of the sector.
- Food service provider Sysco (SYY) and corporate uniform and commercial service company Cintas (CTAS) also both posted double digit returns. While Value continued to trail Growth broadly, high quality COVID-impacted businesses are rebounding.
- At the other end of the return distribution, Becton Dickinson (BDX) was an outsized laggard down 13.7% as the life science company reported weaker than expected results.
- Both of the Utility components on the Dividend Aristocrats – Continental Edison (ED) and Atmos Energy (ATO) – posted returns of -5% to -6% as utilities underperformed as long interest rates increased. Losses accelerated after the virtual Jackson Hole symposium and the Fed’s announcement of a move towards average inflation targeting, which steepened the yield curve and made regulated cash flows of utilities less attractive to investors.
For those bemoaning the snapback in the broad market index that has pushed the 2020 total return towards double digits, this list of defensive businesses with long-term views and a strong performance history is down slightly on the year. I hope this list provides a useful screen for Seeking Alpha readers.
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 circumstances vary significantly, and information gleaned from my articles should be applied to your own unique investment situation, objectives, risk tolerance, and investment horizon.
Disclosure: I am/we are long NOBL,SPY. 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.