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Dividend Aristocrats 2021: Is Dividend Growth a Good Investing Strategy?

S&P 500® Dividend Aristocrats® measure the performance of S&P 500 companies that have increased dividends every year for the last 25 consecutive years. The basic construction methodology for the index is as follows:

Dividend Aristocrats exist across a wide range of industries, and representation within the index is quite broad.

There are 65 Dividend Aristocrats for 2021:

SymbolNameSectorYears of Annual Dividend Increases10 year Dividend GrowthDividend Yield
ABBVAbbVie Inc.Health Care4818.50%4.85%
ABTAbbott Laboratories**Health Care485.73%1.64%
ADMArcher-Daniels-Midland CoConsumer Staples459.15%2.86%
ADPAutomatic Data ProcessingInformation Technology4611.85%2.11%
AFLAFLAC IncFinancials386.99%2.97%
ALBAlbemarle Corp.Materials2610.52%1.04%
AMCRAmcorMaterials26#N/A0.90%
AOSSmith A.O. CorpIndustrials2721.92%1.90%
APDAir Products & Chemicals IncMaterials3910.43%1.96%
ATOAtmos EnergyUtilities375.74%2.62%
BDXBecton Dickinson & CoHealth Care498.02%1.33%
BENFranklin Resources IncFinancials4113.92%4.48%
BF.BBrown-Forman Corp BConsumer Staples378.10%0.90%
CAHCardinal Health IncHealth Care2510.08%3.63%
CATCaterpillar IncIndustrials279.13%2.26%
CBChubb LtdFinancials279.11%2.03%
CINFCincinnati Financial CorpFinancials604.06%2.75%
CLColgate-Palmolive CoConsumer Staples575.60%2.06%
CLXClorox CoConsumer Staples437.53%2.20%
CTASCintas CorpIndustrials3819.33%0.79%
CVXChevron CorpEnergy346.21%6.11%
DOVDover CorpIndustrials658.22%1.57%
ECLEcolab IncMaterials2911.73%0.89%
EDConsolidated Edison IncUtilities472.54%4.23%
EMREmerson Electric CoIndustrials644.03%2.51%
ESSEssex Property TrustReal Estate267.08%3.50%
EXPDExpeditors InternationalIndustrials2610.03%1.09%
FRTFederal Realty Invt TrustReal Estate534.74%4.98%
GDGeneral DynamicsIndustrials2910.17%2.96%
GPCGenuine Parts CoConsumer Discretionary646.75%3.15%
GWWGrainger W.W. IncIndustrials4911.06%1.50%
HRLHormel Foods CorpConsumer Staples5516.04%2.10%
IBMIntl Business MachinesInformation Technology2510.04%5.18%
ITWIllinois Tool Works IncIndustrials4613.10%2.24%
JNJJohnson & JohnsonHealth Care586.55%2.57%
KMBKimberly-ClarkConsumer Staples495.54%3.17%
KOCoca-Cola CoConsumer Staples586.42%2.99%
LEGLeggett & PlattConsumer Discretionary494.30%3.61%
LINLinde plcMaterials277.90%1.46%
LOWLowe’s Cos IncConsumer Discretionary5818.85%1.50%
MCDMcDonald’s CorpConsumer Discretionary458.35%2.40%
MDTMedtronic plcHealth Care4310.05%1.98%
MKCMcCormick & CoConsumer Staples359.08%2.85%
MMM3M CoIndustrials6210.84%3.36%
NEENextEra EnergyUtilities2610.84%1.81%
NUENucor CorpMaterials481.12%3.05%
ORealty Income Corp.Real Estate264.93%4.53%
PBCTPeople’s United FinancialFinancials281.51%5.57%
PEPPepsiCo IncConsumer Staples487.84%2.76%
PGProcter & GambleConsumer Staples645.16%2.27%
PNRPentair PLCIndustrials454.06%1.51%
PPGPPG Industries IncMaterials496.78%1.50%
ROPRoper Technologies, IncIndustrials2818.36%0.52%
SHWSherwin-Williams CoMaterials4214.05%0.73%
SPGIS&P GlobalFinancials4711.05%0.82%
SWKStanley Black & DeckerIndustrials537.57%1.57%
SYYSysco CorpConsumer Staples516.05%2.42%
TAT&T IncCommunication Services372.16%7.23%
TGTTarget CorpConsumer Discretionary5312.30%1.54%
TROWT Rowe Price Group IncFinancials3412.79%2.38%
VFCVF CorpConsumer Discretionary4812.94%2.29%
WBAWalgreens Boots Alliance IncConsumer Staples4511.46%4.69%
WMTWal-MartConsumer Staples476.18%1.50%
WSTWest Pharmaceutical ServicesHealth Care287.18%0.24%
XOMExxon Mobil CorpEnergy387.18%8.44%

Dividend Aristocrat Underperformance

In 2020, the S&P 500 Dividend Aristocrats significantly underperformed the S&P 500. In fact, you would have to go back to 10yr annualized returns to see the S&P Dividend Aristocrats beat the S&P 500. The table below shows returns vs benchmark for various periods ending January 29, 2021.

The recent underperformance of the S&P 500 Dividend Aristocrat index is likely due to non-divided and new dividend payers like Tesla and Apple – which are excluded from the list of Dividend Aristocrats – leading market performance.

The performance story changes the longer the time period. Beyond 10yrs, the Dividend Aristocrats have created value for investors. Dividend Aristocrats have outperformed in 16 of the 31 years since 1989.

Periods of Dividend Aristocrat outperformance tend to be clustered around bear markets – early 1990s, early 2000s, late 2000s. This makes intuitive sense since higher-beta growth stocks outperform during bull markets but get slaughtered when earnings are chopped due to economic recession. In contrast, more stable companies – ones that tend to fit the profile of Dividend Aristocrats – usually have the balance sheet strength and cash flows to withstand an economic downturn.

(Keep in mind the 10yr in the table data above doesn’t go back far enough to include the last recession.)

Booms and busts are a fact of life. The question investors must ask is which environment will prevail over the next decade. Will tech stocks continue to outperform? Or will the market once again appreciate stable dividend growers? Or do we have to wait for a full market cycle before judging?

In its raw form, the question comes down to growth vs value investing, as the characteristics of Dividend Aristocrats tend to align with those of value companies. Value has materially underperformed growth for some time. Dividends have not made up for the difference, yet many people swear by the dividend growth investing methodology. I believe there is a good reason why.

Source: DividendGrowthInvestor.com

There is a lot more to individual investor performance than index returns.

Investor behaviour is by far a better predictor of portfolio returns than the performance of underlying holdings. The following table compares returns for investors in equity, asset allocation and fixed income funds against benchmark index returns.

Over a 20 year period ending December 31, 2015, equity fund investors saw returns about half that of the index. This is mainly because investors make human mistakes and tend to buy and sell at the wrong times, instead of simply holding and experiencing market returns. Most investors sell after the market has significantly declined and buy after the market has risen.

Dividend growth investing can help control behavioural mistakes.

This investor behaviour has real impacts to wealth. As you can see in the chart below, investors lose about half of what they otherwise should have earned due to emotional mistakes.

Dividend growth investing can help control behavioural mistakes

A dividend received quarterly – even if it is simply reinvested – is a consistent positive reward for being invested. I believe dividends condition investors to want to hold investments.

So while capital levels still fluctuate with the market, a consistent cash inflow helps train the investor to remain fully invested. Indeed, a focus on incoming income makes dividend growth investors want to buy more as prices decline and yields rise. Consequently, I believe dividend growth investing can help investors achieve returns closer to the market rate.