I have spent the last (nope, not gonna admit how much time I’ve spent on this stupid project) hours trying to determine if beating the S&P 500 is as easy as picking the dogs of the dividend aristocrats. These are my conclusions.
Let’s start with a little background. The dividend aristocrats isn’t just the stock market version of that dirty joke all those comedians told in that movie. They’re American listed stocks that have increased dividends for 25 consecutive years and earned their way onto the S&P 500. There are lessor categories for other companies that haven’t made it to aristocrat level like the dividend champions (which include 25 year consecutive dividend raisers which aren’t on the S&P 500), and the dividend achievers (which have increased divvys for a decade consecutively).
Dividend investors love these companies. I’m sure they all want to get the dividend champions and aristocrats into a nice room, feed them all a few glasses of wine, and hug them over and over again. That’s what grownups do, right? I dunno, my parents never told me and I’m afraid to use the internet.
Related: Do dividends matter?
So out of the 8,000 — give or take five hundred or so — publicly traded stocks in North America, these people limit their search to a couple hundred. They’ve effectively eliminated 97.5% of the market right from the get go. I think that’s a huge mistake on their part.
The counter argument goes a little something like this:
a) Daddy needs to get paid.
b) Why would I invest in companies that don’t have stellar dividend history? If they haven’t increased dividends for (x) number of years they must be crap.
c) Dividend stocks outperform non-dividend stocks.
The first and second points are refuted pretty easily. Even in retirement there’s no need to solely invest in stocks that pay a growing dividend. There are a million other products that spit out consistent income, like REITs, preferred shares, and even bonds. Or you could just sell some shares. That’s always a possibility. And, of course, there are plenty of good stocks that don’t pay ever increasing dividends. I own some in the Uproar Fund.
The third point will get its own post at some point, but for now I’ll just say that the point is pretty easily refuted.
For the rest of this article, let’s pretend I’ve drank the kool-aid, and I just invest in dividend growth stocks. I only looked at the dividend aristocrats, because they’re the biggest and best. What if, instead of painstakingly choosing a bunch of stocks from that list, I just randomly took the ten on the list that yielded the most. Would I beat the market?
This information was really difficult to find. Nobody really cared about the dividend aristocrats up until a few years ago, so even though the index officially came to be, nobody did the work of ranking them by yield.
Which means I had to. There are more than 50 dividend aristocrats.
I don’t really want to post all the work I did, so screw it. You’ll just have to take my word for it. But here’s what I did. I took the top 10 yielding dividend aristocrats at the beginning of 2014 and crunched the numbers, seeing how it compared to the S&P 500 and to the aristocrats index.
- High yielding aristocrats: 5.96%
- Index: 6.41%
- S&P 500: 9.63%
Well, that was a bust. At least so far. How about 2013? (Remember, we’re rebalancing each year, punting stocks that don’t qualify any longer).
- High yielding aristocrats: 33.16%
- Index: (couldn’t find the info, but not important)
- S&P 500: 33.69%
Anddddddd another swing and a miss. 2013’s return was nicely goosed by Pitney Bowes, which ended the year up 135.33%. It ended up cutting its dividend that year too.
One thing I quickly noticed after crunching the 2013 and 2014 numbers was certain companies repeating themselves. Seven of the ten companies were exactly the same, highlighted by names like AT&T, Kimberly Clark, Sysco, Consolidated Edison, and so on. The list had boring, predictable stocks on it. It was more conservative than the overall market, so it’s only natural it would outperform it.
I decided to do one more test, this time going back and crunching the numbers for 2009. I figured there would be a lot of financials on the list and it would do well compared to the S&P 500. Most of the financials ended up cutting their dividends anyway, but they did come roaring back after the 2009 lows in March.
I was partly right. It was stuffed with financials, but it didn’t do so well.
- High yielding aristocrats: 16.13%
- S&P 500: 21.62%
Even in 2009 there were three stocks that survived the so-called high yielding list until 2014. Not only did these stocks stay in the dividend aristocrats the entire time, but they were also among the highest yielders. The whole point of choosing them was so they’d graduate off the list. They were the equivalent of that kid who started smoking at 15 and now works at Dairy Queen.
Anyway, this experiment was a big fat failure. You win this round, dividend investors. But I’ll be back for you. MUHAHAHAHAHAHA (coughs uncontrollably).