Companies that are capable of increasing cash payments to shareholders are considered durable based upon their predictable performance patterns. As Dan Lefkovitz, Content Strategist with Morningstar explains,
“To commit to a dividend payment, corporate management must be confident of future cash flows. Once a dividend commitment is made, it’s not withdrawn lightly. The market usually punishes dividend cuts or eliminations severely because they indicate financial distress. Thus dividend-paying companies tend to be competitively well-positioned, cash-generating businesses.”
The strength of the dividend lies in its ability to continually increase dividend payments to shareholders and for that reason, these companies have historically outperformed the S&P 500® by a little more than 1% per year and have been slightly less volatile.
There are around 50 stocks that make up the S&P 500® Dividend Aristocrats® index, these companies have increased their dividend for 25 consecutive years in a row or more. The companies that comprise the Dividend Aristocrats are balanced across eleven sectors within the S&P 500® index and encompass both large cap growth and large cap value companies. This arrangement contrasts with most other dividend-yield based indices, which tend to be more value-oriented in their holdings (and over-weighted toward financial, telecommunication and utility stocks).
According to Sure Dividend, the average dividend yield for the Dividend Aristocrats® companies is 2.5% with an average growth rate of 8.2%. Over the past 10 years (through the period ending December 31, 2017) the S&P 500® Dividend Aristocrats® index has returned 12.14% on an average annual basis, compared to the S&P 500 index which has returned only 8.50% annually during that same period.
This is striking because it validates the fact that predictable dividend paying stocks outperform, the Dividend Aristocrats® index has returned almost 4% more annually than the S&P 500® index with approximately 7% lower standard deviation or risk.
The Dividend Aristocrats® companies are considered elite since they must have increased their dividend payouts for a minimum of 25 consecutive years (or more) and must be part of the S&P 500® index. Also, the company must have a minimum market capitalization of $3 billion.
Real Estate is Getting Hammered
S&P 500® Dividend Aristocrats® index treats each constituent as a distinct investment opportunity without regard to its size by equally weighting each company. In September 1, 2016 “real estate” was separated from “financials” and given its own GICS sector category-significantly raising the bar for an often misunderstood and under-represented asset class. As Thomas Bohjalian, CFA, Executive Vice President and Portfolio Manager with Cohen & Steers explains,
“The change represents an acknowledgement by index providers that real estate has distinct characteristics from other businesses, including financials. While property investment companies may share certain similarities with other capital intensive businesses, their cash-flow-oriented business models and ties to real estate markets have produced a distinctive risk-return profile.”
As illustrated below, “real estate” comprises just 1.9% of the S&P 500® Dividend Aristocrats® index:
Year-to-date, the S&P 500® Dividend Aristocrats® index has returned -1.9%; however, the four Real Estate Investment Trusts (or REITs) included in the index have returned an average of -14% YTD with an average dividend yield of 4.55% (compared with 2.5% for the Dividend Aristocrats® companies).
The REIT sector is, like most yield/income sectors, out of favor and until we get a better feeling for where rates are headed, it will probably remain out of favor. While this is painful for existing positions, it will allow investors to build positions at more attractive valuations and lower entry points.
One thing that must be understood, is that there is no rush to build positions at this point as the market is not going to turn quickly. This is a good time to identify high-quality, solid REITs and gradually build positions in order to create a diversified portfolio of REIT securities.
In addition to the four REITs (Federal Realty, Realty Income, Universal Health Realty Income Trust, and National Retail Properties) that have enjoyed a 25+ year history of exceptional dividend growth, there are three other knocking on the door (with 24 years of consecutive dividend increases), they include: Essex Realty, Tanger Factory Outlets, and Urstadt Biddle. All seven REITs represent a terrific opportunity to capitalize on high-quality dividend payers with a wide margin of safety.
Source: S&P Global and Wikipedia
I own shares in O, SKT, and UBA.
