Last week, I showed readers that a popular high dividend low volatility strategy (NYSEARCA:SPHD) has produced higher realized returns, lower volatility, and smaller drawdowns than the broad market index (NYSEARCA:SPY) over the past roughly thirty years. This article will demonstrate that another dividend strategy, the Dividend Aristocrats (BATS:NOBL), have produced similar risk-adjusted outperformance with lower drawdowns.
Investing in the Dividend Aristocrats is one of my “5 Ways to Beat the Market“. This index measures the performance of equal-weighted holdings of S&P 500 constituents that have followed a policy of increasing dividends every year for at least 25 consecutive years.
The cumulative return series of this group of dividend growth stocks is graphed against the benchmark below, capturing the long-run outperformance of the strategy. The Dividend Aristocrats have outpaced the S&P 500 (NYSEARCA:SPY) by 233 bps per year, nearly doubling the cumulative market return over this nearly 30-year dataset.
Source: Standard and Poor’s; Bloomberg
Using the underlying indices for the S&P 500 and the S&P 500 Dividend Aristocrats index, I examined the worst drawdowns for the strategy and the market benchmark over the study period.
In the table above, I highlight the worst total returns for the strategy over 1-month, 3-month, 6-month, 1-year, 2-year, 3-year, 5-year, and 10-year periods. I have also included the same data for the S&P 500. Unsurprisingly, the worst drawdowns for both strategies largely occurred as the market troughed in early 2009.
Importantly for practitioners of this strategy, the Dividend Aristocrats had a lower drawdown over all periods. This is intuitive. Dividend Aristocrats have proven the ability to continually boost dividends over multiple business cycles. They are long-term focused companies that can weather economic downturns, and we should expect them to outperform in down markets.
The difference is most notable in the 10-year horizon. From March 1999 to March 2009, the S&P 500 produced a -35% return, but the Dividend Aristocrats produced a positive total return in all 10-year periods in the dataset. As seen on the first graph in this article, the Dividend Aristocrats strategy lagged during the inflating of the tech bubble, so the broad market index experienced two major drawdowns through this period (tech bubble and financial crisis), whereas the consistent dividend growth strategy produced better returns in those down markets.
While the Dividend Aristocrats managed to outperform during the most recent downturn, the index did have its fair share of hard hit financials. From July 2008 to May 2009, Bank of America (NYSE:BAC), BB&T (NYSE:BBT), Comerica (NYSE:CMA), First Horizon (NYSE:FHN), KeyCorp (NYSE:KEY), M&T Bank (NYSE:MTB), Regions (NYSE:RF), Synovus (NYSE:SNV), State Street (NYSE:STT), and U.S. Bancorp (NYSE:USB) all were forced from the Dividend Aristocrats after cutting their dividends for the first time in decades. The Dividend Aristocrat index outperformed the broader market despite these constituents leaving the index at relatively depressed prices.
Readers should note that the aforementioned low volatility high dividend strategy that was the subject of a recent article actually outperformed the Dividend Aristocrats through the financial crisis. The low volatility screen likely excluded volatile financials during this rocky period for the market.
While the maximum drawdowns for the Dividend Aristocrats are lower than the broad market, they are still meaningful. Investors in this strategy should understand the performance in the worst market environments. Since the replicating exchange-traded fund has only been in existence since October 2013, you need to look at the underlying index data to understand these results. The underlying index data can be hard to obtain for the average retail investor, so I hope this article provides a welcome service to Seeking Alpha readership.
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 circumstances vary significantly, and information gleaned from my articles should be applied to your own unique investment situation, objectives, risk tolerance, and investment horizon.
Disclosure: I am/we are long NOBL, SPHD, 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.