With Dividend Funds, Passive Could Be Perfect

Ten-year Treasury yields are precipitously flirting with the ominous 5% mark and in that neighborhood, it wouldn’t be surprising if clients are pondering the efficacy of equity income. Nor would be surprising if some advisors felt the same.

Of course, advisors know better. They know that these days, there’s few if any risk-free corners of the bond market and they also know that dividend stocks and the related funds remain important parts of well-balanced portfolios.

For advisors opting for dividend funds, there can be some debate regarding the benefits of active or passive management. Indeed, there are some active managers with established track records of impressive performances in the dividend equity space. Problem is there aren’t a lot, which is to say fund managers aren’t infallible. Nor are the issuers behind them. So there is merit in considering passive dividend strategies.

Proof in Passive Dividend Pudding

Even the most devoted fans of passive funds must acknowledge that passive doesn’t equal perfect. In investing, the existence of “perfect” is debatable, but the data are on the side of passive when it comes to dividend investing.

Of course, not all dividend indexes consistently beat active managers. Nor do all active managers beat dividend benchmarks, but one gauge that has a history of topping active funds is the S&P 500® Dividend Aristocrats. That index is popular with advisors and clients alike because it’s barrier for entry – at least 25 straight years of boosted payouts – is strict.

“Recognized as one of the most prominent dividend indices, the S&P 500 Dividend Aristocrats follows a simple but stringent metric to select constituents,” according to S&P Dow Jones Indices. “These companies tend to exhibit stable earnings, solid fundamentals and strong histories of profitability and growth. The index includes 67 companies as of June 2023.”

To the credit of some active managers, more than managing dividend strategies are beating the S&P 500 Dividend Aristocrats over the past six months, but the longer the time frame, the more that percentage dwindles. Over the past year, just a quarter beat the Aristocrats. Over five years, just 4.2% of active managers accomplish that feat and over past decade, a scant 1.4% topped the index.

Aristocracy Matters

No, the S&P 500 Dividend Aristocrats Index isn’t perfect. Due to the dividend increase streak requirement, it’s under-exposed to technology stocks and it’s a value-heavy gauge. Still, it benchmark’s ability to beat active managers is noteworthy.

“Over the 10 years ending June 2023, the S&P 500 Dividend Aristocrats has generated an impressive 12.0% annualized return—outperforming by a wide margin,” adds S&P Dow Jones.

The point: There’s value in considering passive when it comes to equity income access.

“The track record of significant outperformance is yet another reason why the S&P 500 Dividend Aristocrats is an iconic dividend index. This simple but rigorous methodology has not only proved difficult for most active equity income managers to beat, but it has also made it a standout among its passive peers,” concludes S&P.

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