Have You Met The Dividend Achievers?

Hi folks!  The Tako family is traveling again this weekend — We’re trying to get in one final blast of traveling before the summer is over and the school year begins.  Instead of writing a brand new post today (where I’d typically expound upon the virtues or foibles of investing), I thought we’d look back at an old group of stocks I highlighted over a year ago and see how they’ve performed.

It’s not short-term results I’m interested in after all.  Performance over a long period of time in many different kinds of markets is what interests me.

As you may know, not all strategies work well in all kinds of markets…


The Bull Market Dream

Most people want their investments to do well, that’s a given.  The daydream of being able to live off your investments is one of the key tenets of the financial independence community.  For many people, this simply means they want stock prices to go UP.

In a bull market, (like we’ve experience over the last 9ish years) this kind of investing works great.  Unfortunately, there can be months, years, and sometimes even decades when stocks don’t “go up”.  This frequently has a lot more to do with Mr. Market’s sentiment rather than actual business performance.

Sentiment can change.

For individuals expecting to live off our investment returns, the solution isn’t to delude ourselves into dreams of ever rising prices (hoping the bull market lasts forever)…but to balance capital appreciation with reasonable cash flow from our investments.  This is one of the reason my blog posts frequently cite dividend income as an important part of investment return.

If done correctly, dividends can provide income for a comfortable lifestyle, and you won’t be forced to sell assets in a bear markets just to pay for your lifestyle.

But where can a person find such investments?  The S&P 500 now has a yield under 2%.  A yield that low makes living off investment income alone a rather difficult proposition.


The Dividend Aristocrats

The secret of course isn’t to find the highest yielding investment possible (that’s just a recipe for disaster), but to instead look for investments that can continually grow income year after year.

If you’ve been investing for very long at all, you’ve probably heard of the Dividend Aristocrats — companies from the S&P 500 that have been paying continuously growing dividends for 25 years (or more).  These are the titans of industry, unfazed by little things like recessions and economic “bumps”.

Currently, the Aristocrats index is 51 companies, and you can buy into this group of companies through and ETF —  ProShares S&P 500 Dividend Aristocrats ETF (NOBL) that holds them.  (No affiliation with this fund FYI)

But how do they perform?  In the past the Dividend Aristocrats have outperformed the S&P 500 by a reasonable margin, but in recent years they’ve fallen behind the S&P 500.  Furthermore, the dividend yield on the Aristocrats is not noticeably higher than the S&P index fund.

So what happened?

I’m theorizing here, it could be a case of too much money chasing too few investments.  Rising prices aren’t a good thing when it comes to investment returns.  Once an idea gets popular, the strategy is quickly ruined by too much capital chasing it.  That’s probably the case with the Aristocrats.

Everybody and their grandmother invests in S&P 500 index funds now…which jacks-up the price of the S&P (making it a hard target to beat).  While the yield is slightly higher for the Aristocrats than the greater index, the price difference between the two has been growing.

nobl vs sp500
Since I first published this post on the dividend aristocrats, the difference between it and the S&P 500 has only grown.

It’s been over a year since I first published a comparison between the S&P and the Aristocrats, and the difference has expanded to 2.6%, which still favors the S&P.  Clearly, the bull-market isn’t favoring the Aristocrats.

It’s unfortunate that the strategy hasn’t been working in recent years, but the ETF has only existed since 2013.  That’s not a long time period when it comes to dividend growth.  Over longer time periods (and more recessions), the Dividend Aristocrats have done better.


Almost But Not Quite

But what about all the other dividend growth companies that *are not* part of the S&P 500 and those that don’t have a record quite as prestigious as the Aristocrats?  There are many dividend growth companies that don’t quite have a 25 year record, but are still excellent companies.  Where are those guys?

Think about it — each of the Dividend Aristocrats must have had many years outside the index where they grew dividends and didn’t have the mass popularity they do now.  Presumably these companies wouldn’t be priced at quite as high a premium.  Dividend yields might also be higher.

Well, an index for such a group of companies already exists… it’s called the Nasdaq Dividend Achievers.

To become a part of this index, companies must pay growing dividends for the past 10 years (or more).  Despite requiring a significantly shorter time period than the Aristocrats, this is no mean feat — this means the Achievers were able to raise dividends throughout the Great Recession.

There’s currently two funds which track this index — The Vanguard Dividend Appreciation ETF (VIG)  and the PowerShares Dividend Achievers Portfolio (PFM).

The yield on these funds is ever so slightly higher than the S&P 500, and total performance has lagged the S&P 500:

pfm vig
The Dividend Achiever ETFs (PFM and VIG) have underperformed the S&P 500 (^GSPC).

The Dividend Achievers don’t actually seem to achieve.  In recent years, performance has been even worse than the Aristocrats group, and this has continued into 2018.  So what gives?  Why all the underperformance by such good companies?  Aren’t they appreciated by the market?


Why The Underperformance?

One possible explanation for the underperformance is the Achievers are so focused on raising dividends that they’re neglecting to reinvest in the business.  Such neglect would not show up in the short term.  But, over time this behavior would lead to underperformance and eventually smaller dividend growth (or worse — dividend cuts).

Such a situation is exactly why I sold my Telus shares last year.  While I liked the Canadian cell industry for it’s profitable oligopoly-type economics and growing dividends, things had gotten to the point where continuing payout growth (and a continually rising payout ratio) seemed financially destructive.  That wasn’t a situation I wanted to live with, so I decided to exit that investment.

Another possibility is that the quality of the Dividend Achievers is actually quite poor in aggregate compared to the S&P 500.  They simply can’t compete with the excellent companies in the S&P 500, who already sport excellent dividend growth.

The difficulty here is that we can’t really tell at from the index level.  We’re stuck accepting both good companies and bad companies with the index.


Lessons Learned

Historical research has show that dividend growth stocks have outperformed all other classes of investments over a very long periods of time, as detailed in books like The Future For Investors by Professor Jeremy Siegel.  But that conclusion doesn’t seem to jump out at me in the short term when looking at these indexes.

I’m certain that within the index there are companies that outperform AND manage to pay out growing dividends, but based on current performance these indexes seem like a poor way to find them.

So what are my lessons learned?

  • Business quality matters.  It’s not just about capturing a growing dividend stream.  Management still has to make smart decisions with capital to meet or beat the S&P 500.
  • S&P 500 dividend growth is already quite robust, because most components of the S&P 500 are dividend payers.  Trying to find companies that beat it is hard.
  • The difficulty of making it into the Aristocrats index seems to provide a quality filter that isn’t present in the Achievers index.  Those who survive the longest seem to be strongest.
  • “Diamonds in the rough” may exist in the Achievers index, but their performance is masked by poor performance of poorer companies.
  • For the past 9 years we’ve existed in a period of continuous economic growth and a rising stock market.  Dividend payers tend to be more defensive investments that hold up better under falling market conditions.

Perhaps we’ll again see better performance from these strategies once the market turns.  I would like to revisit this investigation after we enter another bear market to see how performance compares.


Further Study

Most enterprising investors want to look beyond the basic performance of the major indices, and I’m with you there.  I want to open up the machine and see how it works….to find the investments that really matter.

But finding or compiling enough data is always a challenge.  Fortunately, there IS a resource for such data!

A true treasure trove for dividend growth investors — The Drip Investing Resource Center maintains a spreadsheet called the U.S. Dividend Champions.

(There’s also similar spreadsheets for Canada, Sweden, and the UK.)

It’s a truly wonderful source of data, that breaks down dividend growers into 3 categories — Dividend Champions (25+ years), Dividend Contenders (10-25 years), and Dividend Challengers (5-9 years).

While the Dividend Champions spreadsheet is definitely less restrictive than the indexes mentioned in this post, I consider that a good thing.  Companies like REITs are included, and actual dividend growth rates are given significant attention.

If you’re even slightly interested in investing in individual dividend growth stocks, I highly recommend taking a look.


[Image Credit: Flickr]

19 thoughts on “Have You Met The Dividend Achievers?

  • March 1, 2017 at 6:29 AM

    I’m particularly interested to see how both the Dividend Achievers and Dividend Aristocrats perform if the market does take a turn for the worse over the next few years. As you mentioned, dividend paying stocks tend to be stronger during flat markets and bear markets so we could easily see them outperform the S&P 500 in the near future. Thanks for sharing those last two dividend resource links at the end, I’ll have to check those out!

  • March 1, 2017 at 6:58 AM

    I think the under performance stems from the fact that the stocks that have made huge market cap gains, and therefore have high representation on the S&P 500 are not dividend payers or are very recently starting to pay dividends- think AAPL, GOOG, FB, AMZN- this skews the results of the S&P 500 in a meaningful way. I’ll have to do the math & analysis to prove it but from a gut feel perspective this statement seems correct.


    • March 1, 2017 at 10:28 AM

      Yes, that does make sense — The S&P 500 is market cap weighted.

    • August 26, 2018 at 7:55 AM

      That’s what I’m thinking. The tech companies have done very well over the last 10 years. They are overweight now. They focus on reinvesting so not much dividend.

      • August 27, 2018 at 3:33 PM

        Very true statements all around Joe. The problem I have is that the vast majority of those reinvested dollars go to waste.

  • March 1, 2017 at 7:03 AM

    Ooooh, this is good to know. I haven’t heard of the Aristocrats before so it’s just good to know that stocks like that exist.

  • March 1, 2017 at 7:56 AM

    I prefer the list of Dividend Champions, Contenders and Challengers as it is more complete than the Dividend Aristocrats and Dividend Achievers lists. Plus, the spreadsheets include a lot of data that makes a pre-screening process much easier.

    • March 1, 2017 at 10:25 AM

      It really is an excellent resource isn’t it? One of the best I’ve found!

  • March 1, 2017 at 8:45 AM

    Very interesting. The problem if that those index fund doesnt have a 20 or 30 years track record. I own some on them, along with individual dividend stocks. What do you think about SCHD?

    Great blog!

    • March 4, 2017 at 3:05 AM

      Can’t say I have any particular feelings about SCHD. It wasn’t entirely obvious what index they used.

  • March 1, 2017 at 11:10 AM

    Hm, interesting to learn that the Dividend Achievers didn’t really “achieve” in the past few years, due to the constant market growth. Perhaps once the market turns, they’ll start doing better and maybe even beat the S&P 500.

  • March 1, 2017 at 11:15 AM

    I’ve never been involved enough in researching companies to figure out how good or bad their performance is and if their over/under valued. Plug you ears, but I used to just pick companies I personally really liked to do business with and that was my gauge. Bad idea, obviously, but I’m guessing I’m not the only one out there doing that no-no.

    Then I got a little smarter and started to just pick companies I liked that were on the Dividend Aristocrats list. Still not researching the companies, but the odds are a slightly more in my favor.

    Since then though, I’ve given up and became one of the “everybody and their grandmother” that invests mostly in S&P 500 index funds.

    Before I become a complete failure when it comes to the stock market, I added your link to the U.S. Dividend Champions to my favorites. Maybe I can learn a thing or two from that list! 🙂

    — Jim
    Jim @ Route To Retire recently posted…Why Do We Buy Crap??

  • March 1, 2017 at 10:50 PM

    “Dividend payers tend to be more defensive investments that hold up better under falling market conditions. ”

    This is exactly why we set up our portfolio so that we can live off the dividends + fixed income during market crashes. Would’ve been less focused on dividends and more on capital gains if we were still working, but in retirement, gotta hedge against market downturns.

    That’s a great point you made about the trade off of Achievers focusing too much on raising dividends and not re-investing back into the business. That’s why purely yield chasing is a very bad idea (which is what we were originally thinking of doing before we learned more about index investing), but so is only chasing capital gains. Gotta balance between returns and risk. Especially in retirement.

  • March 3, 2017 at 2:59 AM

    I wonder how Dividend Achievers and Dividend Aristocrats would perform when there’s a turn in the market. Anyways, thanks a ton for sharing those links of dividend resources at the end of the article, they are really worth reading. Actually, Dividend Achievers didn’t really achieve anything in the last few years. But it’ll do a lot better when the market takes a turn. But still, nothing is predictable in the market. Anyways, thanks for sharing the article, it is really informative and helpful.

  • March 3, 2017 at 5:03 AM

    Seems like the week for posts about dividends…so interesting to read GoCurryCracker’s and now yours. We were actually turned on to the power of dividends as an investment instrument by seeing your dividend income–impressive! Another reason why index investing is appealing, as the S&P 500 also tend to have strong dividend yields.

    • March 3, 2017 at 8:29 AM

      Yep! When I averaged out the long term dividend growth rate for the S&P 500, the result was an average of 5.97%. That’s pretty incredible when you think about it.

  • August 25, 2018 at 10:28 AM

    Interesting that you were investing in Telus! Why a Canadian company? I figured you would’ve picked T-mobile, Verizon, or some other US telecom company.

    • August 27, 2018 at 3:31 PM

      Basically, I liked the economics of it. The cell phone biz in Canada is very much an oligopoly and the players were quite cheap compared to U.S. markets. I did OK on the investment overall, but currency swings killed the big gains.


Leave a Reply

Your email address will not be published. Required fields are marked *

CommentLuv badge
Mr. Tako Escapes