This has been a very fine year for dividend strategies, particularly exchange traded funds focusing on stocks with consistent track records of growing payouts.
Just look at the ProShares S&P 500 Dividend Aristocrats ETF (CBOE: NOBL). That fund is up 25% year to date and while that lags the S&P 500, NOBL has been less volatile than the benchmark U.S. equity gauge and is higher by 6.35% in the fourth quarter.
NOBL, which is one of the fastest growing dividend ETFs in the U.S., follows the S&P 500 Dividend Aristocrats Index. That benchmark mandates that member firms have minimum dividend increase of 25 years. That's a stiff requirement and one that explains why NOBL is home to just 57 stocks.
Why It's Important
Although S&P 500 earnings growth is projected to be 9.6% next year, according to FactSet, NOBL's utility could be on display if profit growth slows or misses expectations.
“In a market susceptible to fits and starts, investors remain understandably attracted to dividend strategies,” S&P Dow Jones Indices said in a recent note. “Beyond the obvious appeal of a potential income stream during a time of low fixed-income yields, dividends have historically provided a sizeable slice of total-returns pie. In fact, dividends have accounted for roughly one-third of S&P 500 Total Return Index performance going back to 1960.”
NOBL allocates over 34% of its combined weight to the industrial and consumer discretionary sectors, two of the groups forecast to post double-digit earnings growth next year. Recent data suggest NOBL's holdings can perform well in tricky earnings environments.
“In particular, investors might want to look into the S&P 500 Dividend Aristocrats—high-quality companies that have not just paid dividends but grown them for at least 25 consecutive years,” notes S&P Dow Jones. “In fact, the Aristocrats delivered positive, if moderate, earnings growth during the first two quarters of 2019. Over time, companies that have grown their dividends like this generally have had stable earnings and solid fundamentals.”
In this century, dividends, on average, have accounted for about a third of total returns, but a case can be made that percentage could increase in 2020 and over the new decade.
“So, considering their historical average around 33%, how important will dividends be going forward?,” ponders S&P. “A credible argument can be made that dividends are likely to represent an above-average proportion of, and be a significant contributor to, near-term returns.”