Investing in Dividend Aristocrats ETFs

Income investors often consider fixed-income investments or dividend-paying companies in their quest for yield. For many years, interest rates have been so low, diminishing the attractiveness of investment grade bonds as a source of reasonable income. While there are dividend stocks that pay above-inflation yields, unexpected headwinds can prompt companies to cut or cancel their dividend payouts. In this article, we introduce you to "The Dividend Aristocrats", an exclusive list of elite dividend-paying companies that have withstood the test of time.

What are the dividend aristocrats?

Simply put, "The Dividend Aristocrats" is an exclusive club of publicly listed companies in the S&P 500 stocks with 25+ years of consecutive dividend increases. The basket of these unique stocks is wrapped as an index by S&P Dow Jones – called the S&P 500 Dividend Aristocrats index (SPDAUDP).

The index is equally weighted and measures the performance of these aristocrats. As of February 28th, 2022, the index is comprised of 65 holdings with a total market cap of $5.6 trillion. Its top 10 constituents currently account for 18% of the portfolio.

The consumer staples sector has the largest allocation (21.5%), followed by industrials (19%), financials (13%), materials (12.2%), and healthcare (11.5%).

Which companies can be considered dividend aristocrats?

To be included in the exclusive index, the stock must be a member of the flagship S&P 500 and have a record of 25 years' worth of dividend bumps.

In addition, companies must be worth at least $3 billion at the time of each quarterly S&P 500 rebalancing and should have an average trading volume of at least $5 million for the trailing three-month period before each quarterly rebalancing date.

Finally, to maintain diversification, the index should have at least 40 holdings at each rebalancing and no sector as per the Global Industry Classification Standard (GICS) accounting for more than 30% of the index weight.

The full list of dividend aristocrats

Source: USnews.com – as of January 2022

Investors in single dividend aristocrat stocks or funds that track the SPDAUDP can almost guarantee a steady stream of income. As of February 9th, 2022, the average dividend yield in the index was 2.26%. Below is the latest list of the dividend aristocrats and the number of consecutive years of dividend increases.

Although the total number of dividend aristocrats remained flat at 65 between the annual rebalancing in 2021 and 2022, the index welcomed two new members and bid farewell to two others.

The newcomers:

• Brown & Brown (BRO): Insurance company
• Church & Dwight (CHD): Manufacturing company

The departures:  

• AT&T Inc. (T): Telecom company
• Leggett & Platt Inc. (LEG): Manufacturing company

Performance vs. S&P 500 and Nasdaq 100

Source: spglobal.com– as of March 22nd, 2022

Over the past 5 years, S&P 500 Dividend Aristocrats NTR registered a 5-YR annualized return of +12.83% — hence it underperformed the main S&P 500 NTR Index, which generated a 5-YR annualized return of +15.4%. However, as per the index's fact sheet, the S&P Dividend Aristocrats index has exhibited lower risk than the benchmark, as measured by standard deviation. This has led to much closer risk-adjusted returns for the Dividend Aristocrats relative to the broader market in the past 10 years.

Dividend Aristocrats ETFs

Investors looking to invest in the full list of dividend aristocrats can seek Dividend Aristocrats ETFs. These passive exchange-traded funds track the S&P 500 Dividend Aristocrats index NTR or close variations and invest in the underlying holdings.

For North American investors:

SPDR S&P Dividend ETF (SDY)

• Underlying Index: S&P High Yield Dividend Aristocrats Total Return Index - USD
• Assets under management: $20.7 billion
• Expense ratio: 0.35%

ProShares S&P 500 Dividend Aristocrats ETF (NOBL)

• Underlying Index: S&P 500 Dividend Aristocrats Total Return Index - USD
• Assets under management: $10 billion
• Expense ratio: 0.35%

FT Vest S&P 500 Dividend Aristocrats Target Income ETF (KNG)

• Underlying Index: Cboe S&P 500 Dividend Aristocrats NTR Index – USD
• Assets under management: $464 million
• Expense ratio: 0.75%
• Index strategy: It targets an equal-weighted portfolio of the stocks contained in the S&P 500 Dividend Aristocrats Index that have options that trade on a national securities exchange. A layer of rolling series of short (written) call options on each of the Aristocrat Stocks (the "Covered Calls") is added. This strategy focuses on generating an annualized level of income from stock dividends and option premiums that is approximately 3% over the annual dividend yield of the S&P 500 Index.

iShares US Dividend Growers Index ETF (CUD)

• Underlying Index: S&P High Yield Dividend Aristocrats CAD Hedged Total Return Index - CAD.
• Assets under management: CA$382.52 million
• Expense ratio: 0.66%

Investors can also explore other ETFs with exposure to dividend aristocrats outside of the S&P 500 or domiciled in other countries such as:

• ProShares S&P MidCap 400 Dividend Aristocrats ETF (REGL)
• iShares S&P/TSX Canadian Dividend Aristocrats Index ETF (CLYLF)
• SPDR S&P Global Dividend ETF (SDY)
• ProShares S&P Technology Dividend Aristocrats ETF (TDV)
• First Trust S&P International Dividend Aristocrats ETF (FID)

Please note that these aristocrats may have different characteristics and inclusion requirements than the S&P 500 Aristocrats.

For European investors:

SPDR S&P US Dividend Aristocrats UCITS ETF (UDVD)

• Underlying Index: S&P High Yield Dividend Aristocrats Net Total Return Index - USD
• Assets under management: $3.73 billion
• Expense ratio: 0.35%

Investors can also explore other ETFs with exposure to dividend aristocrats outside of the S&P 500 or domiciled in other countries such as:

• SPDR S&P Global Dividend Aristocrats UCITS ETF (ZPRG)
• SPDR S&P Euro Dividend Aristocrats UCITS ETF (SPYW)
• SPDR S&P UK Dividend Aristocrats UCITS ETF (UKDV)
• SPDR S&P Pan Asia Dividend Aristocrats UCITS ETF (PADV)
• UBS ETF S&P Dividend Aristocrats ESG UCITS ETF (GLDVD)
• Lyxor S&P Eurozone ESG Dividend Aristocrats (DR) UCITS ETF (SGQA)
• SPDR S&P Emerging Markets Dividend Aristocrats UCITS ETF (EDVD)
• Lyxor S&P Eurozone ESG Dividend Aristocrats (DR) UCITS ETF (SGQE)
• SPDR S&P Global Dividend Aristocrats ESG UCITS ETF (ZPD3)
• SPDR S&P Euro Dividend Aristocrats ESG UCITS ETF (ZPD9)

Please note that these aristocrats may have different characteristics and inclusion requirements than the S&P 500 Aristocrats.

Reasons to consider Dividend Aristocrats ETFs

Disclaimer: Not investment advice

• According to S&P Down Jones Indices, the S&P 500 Dividend Aristocrats has outperformed the S&P 500 (benchmark) 69.29% of the time in down months and 43.43% of the time in up months. The index also had a lower drawdown level compared with the benchmark index. Data from Jan. 31, 1990, to June 30, 2021 
• Dividend aristocrats are mostly solid businesses that managed to increase their dividend payouts for 25+ years despite the challenges they've faced throughout the years (e.g Wars, 2008 Financial Crisis, COVID-19 pandemic). 
• A company that increases its dividend for 25+ years shows that it is committed to good governance 
• While a >2.0% dividend yield might not sound appealing in a high-inflation environment, it remains a solid place to park capital and generate passive income.

Did you know about dividend kings?

If you think the dividend aristocrats list is impressive, meet the dividend kings. Dividend kings are companies that have consistently increased their dividends for at least 50 years! This unique list includes companies like Coca-Cola, Procter & Gamble, 3MM, Johnson & Johnson, and Target – to mention a few. Due to the small sample size (less than 30 companies are dividend kings), there is no index or ETF specifically for dividend kings.

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