Dividend stocks aren't usually inexpensive, particularly not in noticeable fashion. As advisors well know, high dividend strategies are usually chock full of defensive sectors, such as real estate and utilities, which often sport premiums relative to the broader market.
That's the price to pay when playing defense. Likewise, companies with long histories of payout growth usually sport quality traits and quality stocks usually don't come cheap. Of course, valuation alone isn't a reason to buy or sell a security, but the good news for advisors and clients is that some dividend growth stocks aren't richly valued today.
In fact, some are downright inexpensive and that's notable because with bonds yield low, inflation running hot and interest rate hike angst increasing, dividend stocks are becoming the place to be these days among traditional, income-generating assets.
An obvious bargain spot among dividend-paying equities is the S&P 500 Dividend Aristocrats Index, which requires member firms to have minimum payout increase streaks of at least 25 years.
Aristocracy on the Cheap
Currently, there's plenty of chatter about U.S. equities being pricey and that is the case, though not alarmingly so. Importantly, multiple expansion in the first half of 2021 was fueled by earnings growth, but that growth will eventually taper off. At some point, some companies are likely to miss earnings estimates, which could punish those stocks. The S&P 500 Dividend Aristocrats Index can help clients avoid those troublespots.
“A potential solution can be found with the S&P 500 Dividend Aristocrats, high-quality companies that have grown their dividends continuously for at least 25 consecutive years,” according to ProShares research. “The Dividend Aristocrats have historically demonstrated hallmarks of quality like stable earnings, solid fundamentals, and strong histories of profit and growth. Stocks like the Dividend Aristocrats are arguably well positioned to continue consistently delivering the earnings growth 'fuel' that could drive future market returns.”
With industrial and financial services stocks combining for more than 35% of the S&P 500 Dividend Aristocrats Index and consumer staples and healthcare combining for north of 29%, the benchmark features a decent mix of cyclical value and defensive holdings. Even better news: The aristocrats are as cheap as they've been in more than a decade.
“The S&P 500 Dividend Aristocrats are also trading at the cheapest valuation levels relative to the S&P 500 in over a decade,” adds ProShares. “While investors often pay a premium for quality stocks like the Dividend Aristocrats, causing them to trade at higher valuation levels compared with the S&P 500, today’s situation is much different. Relative to the S&P 500, the Dividend Aristocrats traded at roughly 80% of the market’s P/E valuation as of 6/30/21. This is the cheapest level the Aristocrats have traded since March 31, 2010.”
More Benefits with the Aristocrats
One of the primary issues facing advisors today when it comes to clients' fixed income allocations is that low starting yields historically portend limited upside going forward. The opposite can be true with equity valuations.
As noted above, valuation alone isn't a reason to buy or a sell a security and it's not always an accurate predictor of future returns. That said, the current low multiples on the dividend aristocrats could be useful information for clients with long-term time horizons.
“We can use historical performance information for the S&P 500 Dividend Aristocrats to provide some evidence,” notes ProShares. “The last time the S&P 500 Dividend Aristocrats Index traded at similar valuation levels relative to the S&P 500 was the end of first quarter of 2010, shortly after the 2007-2008 Financial Crisis. From that point, it outperformed the S&P 500 over the subsequent 1-, 3- and 5-year periods, indicating that today’s discounted valuations may be another potentially opportune entry point.”
Put it all together and with room to run for payouts to return to pre-coronavirus pandemic heights, the S&P 500 Dividend Aristocrats Index, accessible with the ProShares S&P 500 Dividend Aristocrats ETF (NOBL), is an appealing idea for income-starved clients today.
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