By Philip van Doorn
Faithful investors in companies that have raised payouts rapidly, including Target and McDonald’s, have been rewarded with excellent stock performance
Stock-market investors typically want to anticipate industry events or companies’ successes so they can make as much money as possible. But as a new year begins, a look back can be useful, especially if you are looking for dividend income.
One risk with selecting stocks by dividend yield is falling into a “value trap,” which might be a mature company that is growing very slowly, if at all. Some of these companies focus on financial performance rather than growing sales and entering into new product or service categories.
A better approach might be to build dividend income over time. There are many examples of companies that had modest (but decent) dividend yields five years ago, but have increased dividend payments so much since then that yields are now high for faithful investors.
Below is an example, drawn from the S&P 500 Dividend Aristocrats Index . This index is made up of 65 companies in the benchmark S&P 500 index that have increased dividends on common shares for at least 25 consecutive years.
That’s the only criterion for inclusion as an Aristocrat — it makes no difference how high a stock’s current yield is. The idea is that increasing the dividend consistently shows a commitment to shareholders’ interests and can lead to good performance. You can invest in the Dividend Aristocrats as a group through the ProShares S&P 500 Dividend Aristocrats ETF (NOBL).
Steve Goldstein pointed out that NOBL is an easy way to diversify away from the technology companies that dominate the market-cap-weighted S&P 500.
Investors can take some comfort from a 25-year history of dividend increases, because a dividend cut can be terrible for a stock’s performance. But even an Aristocrat may reduce its payout. AT&T Inc. (T) is still included in the S&P 500 Dividend Aristocrats Index because it hasn’t yet made its announced dividend cut, planned after it completes the spinoff of its WarnerMedia business in a deal with Discovery Inc. (DISCA) that was announced in May. AT&T’s shares were down 8% in 2021 with dividends reinvested — only 12% of the S&P 500 declined for the year.
Moreover, a steadily increasing dividend is no guarantee of a market-beating performance. Only about a third of today’s Dividend Aristocrats have done so over the last five years.
Read:These are the best-performing S&P 500 and Nasdaq-100 stocks of 2021
For a dividend-compounding example from the S&P 500 Dividend Aristocrats, consider the performance of a five-year investment in T Rowe Price Group (TROW):
In the above example, the yield figures aren’t extreme, and the current yield on the shares is less than it was five years ago. Then again, if you held T. Rowe Price for five years, your dividend yield would now be high, using your purchase price. And the five-year price increase of 161% compares to an increase of 113% for the S&P 500, while T. Rowe Price’s five-year total return of 203% compares to 133% for the S&P 500.
The ‘best’ dividend compounders among the S&P 500 Dividend Aristocrats
Starting with the current list of 65 Dividend Aristocrats, here are the 12 with the highest five-year CAGR for the annual dividend rate and had dividend yields of at least 2.00% at the end of 2016:
Company Ticker Five-year dividend CAGR Dividend yield on shares purchased five years ago Dividend yield -- five years ago Current dividend yield Price change -- 5 years Total Return -- 5 Years AbbVie Inc. ABBV 17.1% 9.01% 4.09% 4.17% 116% 172% T. Rowe Price Group Inc. TROW 14.9% 5.74% 2.87% 2.20% 161% 203% Illinois Tool Works Inc. ITW 13.4% 3.98% 2.12% 1.98% 102% 127% Aflac Inc. AFL 13.2% 4.60% 2.47% 2.74% 68% 89% Automatic Data Processing Inc. ADP 12.8% 4.05% 2.22% 1.69% 140% 167% Abbott Laboratories ABT 12.1% 4.89% 2.76% 1.34% 266% 300% NextEra Energy Inc. NEE 12.1% 5.16% 2.91% 1.65% 213% 252% Air Products and Chemicals Inc. APD 11.8% 4.17% 2.39% 1.97% 112% 138% McCormick & Company Inc. MKC 9.5% 3.17% 2.01% 1.53% 107% 125% Atmos Energy Corp. ATO 8.6% 3.67% 2.43% 2.60% 41% 58% Target Corp. TGT 8.4% 4.98% 3.32% 1.56% 220% 269% McDonald's Corp. MCD 8.0% 4.53% 3.09% 2.06% 120% 149% Source: FactSet
You can click the tickers for more about each company. Click here for Tomi Kilgore’s detailed guide to the wealth of information for free on the MarketWatch quote page.
To be sure, the Dividend Aristocrats haven’t all been excellent performers. The above list includes many of the best-performing Dividend Aristocrats on a total-return basis. Among the 65 components of the index, only 21 have beaten the S&P 500’s total return over the past five years.
Investing in the Dividend Aristocrats as a group
Have the Dividend Aristocrats as a group fared better than the S&P 500 over very long periods? Here’s a comparison of average annual returns for the S&P 500 Dividend Aristocrats and the full S&P 500 for various periods through the end of 2021:
Average annual returns Index 5 years 10 years 15 years 20 years 25 years 30 years S&P 500 Dividend Aristocrats 15.7% 15.4% 11.7% 11.2% 11.5% 11.8% S&P 500 18.5% 16.6% 10.7% 9.5% 9.8% 10.6% Source: FactSet
Over the past five and 10 years, the full S&P 500 index has outperformed the S&P 500 Dividend Aristocrats. But the Aristocrats as a group have outperformed for the longer periods.
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-Philip van Doorn
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