Through the first five months of this year, more than 10% of the S&P 500’s dividend payers cut or suspended those payouts while just 17% boosted those rewards. The rough environment for dividend seekers reminds investors quality strategies, such as the ProShares S&P 500 Aristocrats ETF (NOBL ), remain vital for income.
NOBL tracks the S&P 500 Dividend Aristocrats Index, targets the cream of the crop, only selecting components that have increased their dividends for at least 25 consecutive years. Consequently, investors are left with a portfolio of high-quality, sustainable dividend payers.
Rampant dividend cutting against the backdrop of the coronavirus makes it difficult for many investors to remember that dividend stocks usually less volatile and often outperform their non-dividend counterparts in turbulent environments.
“So it behooves investors—both those focused on dividend income and those focused on total return—to pay attention to how companies are managing their dividends during this pandemic,” said ProShares in a recent note==.
Energy and real estate are two of the worst dividend offending sectors this year, but NOBL allocates just over 7% of its weight to those groups. Fortunately, the fund’s energy holdings haven’t been dividend cutters, at least not yet. Rather, Exxon and Chevron merely appear unlikely to boost payouts this year.
The quality traits offered by dividend growth stocks are also meaningful at a time when low-interest rates may lure some investors to high-yield stocks, but many of those names are potential dividend offenders.
“Dividend income funds, on average, had higher yields and payout ratios, but their dividends grew at a slower rate than the other two groups,” said Morningstar in a recent note. “They also tended to have a more pronounced value tilt. On average, their holdings traded at lower price/book ratios than the other groups, and they were less profitable, as measured by return on invested capital.”
For long-term investors, particularly those with a time frame that can indulge reinvesting dividends, payout growth can have a substantial, positive impact on total returns, underscoring the point that dividend growth matters.
Many of NOBL’s components carry investment-grade credit ratings, another important factor for dividend investors to consider.
“Only one-fifth as many dividend cutters and eliminators have come from the top quintile of the S&P 500 by credit rating. Nearly five times that number have come from the bottom quintile. A similar picture appears when sorting by dividend yield. Companies in the highest quintile of dividend yield, those whose ability to pay may become stretched in challenging markets, account for more than double the number of dividend cuts and eliminations versus those in the bottom quintile with more modest dividend yields,” according to ProShares.