Dividend Aristocrats 2021: Is Dividend Growth a Good Investing Strategy?
S&P 500® Dividend Aristocrats® measure the performance of S&P 500 companies that have increased dividends every year for the last 25 consecutive years. The basic construction methodology for the index is as follows:
Dividend Aristocrats exist across a wide range of industries, and representation within the index is quite broad.
There are 65 Dividend Aristocrats for 2021:
Dividend Aristocrat Underperformance
In 2020, the S&P 500 Dividend Aristocrats significantly underperformed the S&P 500. In fact, you would have to go back to 10yr annualized returns to see the S&P Dividend Aristocrats beat the S&P 500. The table below shows returns vs benchmark for various periods ending January 29, 2021.
The recent underperformance of the S&P 500 Dividend Aristocrat index is likely due to non-divided and new dividend payers like Tesla and Apple - which are excluded from the list of Dividend Aristocrats - leading market performance.
The performance story changes the longer the time period. Beyond 10yrs, the Dividend Aristocrats have created value for investors. Dividend Aristocrats have outperformed in 16 of the 31 years since 1989.
Periods of Dividend Aristocrat outperformance tend to be clustered around bear markets - early 1990s, early 2000s, late 2000s. This makes intuitive sense since higher-beta growth stocks outperform during bull markets but get slaughtered when earnings are chopped due to economic recession. In contrast, more stable companies - ones that tend to fit the profile of Dividend Aristocrats - usually have the balance sheet strength and cash flows to withstand an economic downturn.
(Keep in mind the 10yr in the table data above doesn't go back far enough to include the last recession.)
Booms and busts are a fact of life. The question investors must ask is which environment will prevail over the next decade. Will tech stocks continue to outperform? Or will the market once again appreciate stable dividend growers? Or do we have to wait for a full market cycle before judging?
In its raw form, the question comes down to growth vs value investing, as the characteristics of Dividend Aristocrats tend to align with those of value companies. Value has materially underperformed growth for some time. Dividends have not made up for the difference, yet many people swear by the dividend growth investing methodology. I believe there is a good reason why.
There is a lot more to individual investor performance than index returns.
Investor behaviour is by far a better predictor of portfolio returns than the performance of underlying holdings. The following table compares returns for investors in equity, asset allocation and fixed income funds against benchmark index returns.
Over a 20 year period ending December 31, 2015, equity fund investors saw returns about half that of the index. This is mainly because investors make human mistakes and tend to buy and sell at the wrong times, instead of simply holding and experiencing market returns. Most investors sell after the market has significantly declined and buy after the market has risen.
This investor behaviour has real impacts to wealth. As you can see in the chart below, investors lose about half of what they otherwise should have earned due to emotional mistakes.
Dividend growth investing can help control behavioural mistakes
A dividend received quarterly - even if it is simply reinvested - is a consistent positive reward for being invested. I believe dividends condition investors to want to hold investments.
So while capital levels still fluctuate with the market, a consistent cash inflow helps train the investor to remain fully invested. Indeed, a focus on incoming income makes dividend growth investors want to buy more as prices decline and yields rise. Consequently, I believe dividend growth investing can help investors achieve returns closer to the market rate.