The Dividend Aristocrat Strategy

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November 8, 2013 3:51pm NYSE:NOBL

strategyAndy Crowder: How would you like to buy an index of blue-chip companies that have raised their dividends for the last 25 years and more importantly, outperformed the S&P 500 by more than 3% annually?


Well, have you heard of the Dividend Aristocrats?

The aristocrats are the strongest of the strong in the S&P 500 – the companies with the best track records of increasing dividends.

A dividend aristocrat is considered the gold standard for dividend-generating stocks. Income investors seeking safety and a steady stream of income gravitate toward the dividend aristocrats particularly during a period of rock-bottom interest rates.

After doing a little research myself on the long-term performance of the dividend aristocrat strategy I couldn’t believe the returns I found. Could investors really generate this much income by using this strategy?

The Dividend Aristocrat Strategy

I emailed a colleague of mine, Steve Mauzy, my go-to guy when it comes to dividend investing. I asked if the numbers I stumbled across could be correct because they seemed high to me.

Shortly after I sent my email Steve responded with a resounding, “Yes, your numbers are accurate!” Along with his response he forwarded me a spreadsheet he created with some surprising figures.

According to his figures, the Aristocrats Index has had a five-year annualized annual return of 14% and a one-year return of 25%, compared with 10% and 20% returns, respectively, for the S&P 500.

Moreover, using this strategy, an investment in Southern Company (NYSE: SO) 10 years ago had an average annual return of 11.7%. The S&P 500 only rose 9.7% over that same period.

Going back 20 years, the returns were even more impressive. A $10,000 purchase of Colgate-Palmolive (NYSE: CL) grew to $102,190 – a return of over 900%.

You won’t find stocks like these on anyone’s hot lists. Yet a large number of dividend aristocrats outperform the market each and every year, decade after decade because they all have one thing in common: they are long-term dividend growers. They pay dividends and raise them every year.

After Steve’s email I began looking at all of the stocks that qualify as a dividend aristocrat. Most of them are boring companies. McDonald’s (NYSE: MCD) and Coca-Cola (NYSE:KO) are just a few of the names. But they all produce spectacular results over the long term. And if you reinvest the dividends, look out, your returns really amplify.

There are a few ways to invest in dividend aristocrats.

ProShares just announced an ETF called the Aristocrats ETF (NOBL) which tracks the S&P 500 Dividend Aristocrats Index. The ETF is equally weighted and currently holds 54 companies.

“The core theory behind the index is that companies that have a record of growing year-over-year dividends tend to be ones that may outperform the broader index over time with less volatility,” said Michael Sapir, chairman of ProShares. “We see this fund as potentially being part of a core holding in a portfolio.”

This article is brought to you courtesy of Andy Crowder from Wyatt Investment Research.


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