When interest rates rally sharply, the Dividend Aristocrats (BATS:NOBL) tend to outperform. Companies with an ability to increase their dividends for twenty-five consecutive years have defensive attributes that markets favor in the risk-off environments that send Treasury bonds rallying sharply. These more fixed income-like characteristics tend to lead to market outperformance in down markets. After all, the Dividend Aristocrats have outperformed the broader S&P 500 (SPY) in each of the six negative years for the broad market - 2018, 2008, 2000-2002, and 1990.
In January 2020, the 10-year Treasury yield fell 41bp on the month as markets reacted to the dual black swans of rising Iranian tensions and the spreading Wuhan coronavirus. In the last 30 years, there have been only 18 months (0.5% of all observations) where the 10-year Treasury yield has rallied that much. In those 18 months, the Dividend Aristocrats have outperformed by 0.85% on average, an annualized outpeformance of roughly 10%.
When Treasuries rally this sharply, the Dividend Aristocrats tend to outperform. In January 2020, the Dividend Aristocrats returned -2.58%, lagging the S&P 500 by 254bp. There have been only two episodes where Treasuries rallied so sharply on the month and the Dividend Aristocrats fared worse on a relative basis in the past three decades.
In July 1997, the 10-year Treasury yield rallied 49bp and the Dividend Aristocrats lagged by 2.57% as Treasuries reacted to the first news of the Asian Financial Crisis emanating from Thailand. In September 1998, the Dividend Aristocrats lagged by 2.76% as 10-year Treasuries rallied 61bp as the bond market responded to the Russian default and the blow-up of hedge fund Long Term Capital Management. In both of those monthly episodes, tech stocks outperformed as the tech bubble began its early inflation, pushing the broad market ahead of dividend growth equities.
In January 2020, the market moved sideways amidst a different form of crisis emanating from Asia, but Tech once again outperformed. Tech (XLK) rallied nearly 4%. Amazon (AMZN) also drove consumer discretionary (XLY) modestly into the green. In combination those two sectors contributed to 70% of the return differential between the broad market and the S&P 500 Dividend Aristocrats on the month.
With dividend stocks underperforming in an environment where they tend to do well perhaps Seeking Alpha readers can suss out some value in individual components. The next table below lists the 57 constituents, sorted descending by indicated dividend yield, and lists total returns, including reinvested dividends, over trailing 1-, 3-, 6-, and 12-month periods. Performance data is through the end of trading in January.
Below are some observations from the monthly list of the performance of the Dividend Aristocrat constituents:
- While the large underweight in the Dividend Growth index to the Tech heavyweights contributed disproportionately to the underperformance, rate-sensitive utilities (XLU) were still the best performing sector in the S&P 500 and the Dividend Aristocrat Index on the month.
- The highest yielding components in the Dividend Aristocrat Index uniquely lagged. Four of the seven worst performers on the month - Exxon (XOM), Chevron (CVX), Nucor (NUE), and Walgreens Boots Alliance (WBA) - are among the ten Dividend Aristocrats with the highest dividend yields.
- The 28 highest yielding companies on the list delivered an equal-weighted return of -3.52% while the 28 lowest yielding companies delivered an equal-weighted return of -0.99%.
- Exxon Mobil (XOM) is now trading with a higher dividend yield than AT&T (T). This is the first time since October 2001 that the oil supermajor has offered dividend investors a higher payout than the telecommunications giant. While the Iranian tensions early in the month moved oil higher in the short-term, concerns about global growth again weighted on energy companies on the month, an extension of their decade of subpar returns.
I hope this screen of the Dividend Aristocrats proved useful to Seeking Alpha readers trying to determine which dividend growers to build their portfolio around. I continue to prefer owning all of them through the ProShares S&P 500 Dividend Aristocrats ETF (NOBL), and the automatic periodic rebalancing to equal-weights that vehicle affords.
Disclaimer: My articles may contain statements and projections that are forward-looking in nature, and therefore inherently subject to numerous risks, uncertainties, and assumptions. While my articles focus on generating long-term risk-adjusted returns, investment decisions necessarily involve the risk of loss of principal. Individual investor circ*mstances vary significantly, and information gleaned from my articles should be applied to your own unique investment situation, objectives, risk tolerance, and investment horizon.
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Institutional investment manager authoring on a variety of topics that pique my interest, and could further discourse in this online community. I hold an MBA from the University of Chicago, and have earned the CFA designation. My articles may contain statements and projections that are forward-looking in nature, and therefore inherently subject to numerous risks, uncertainties and assumptions. While my articles focus on generating long-term risk-adjusted returns, investment decisions necessarily involve the risk of loss of principal. Individual investor circ*mstances vary significantly, and information gleaned from my articles should be applied to your own unique investment situation, objectives, risk tolerance, and investment horizon.
Analyst’s Disclosure: I am/we are long NOBl, SPY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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