Buy ‘Aristocrat’ Funds for the Quality, Not the Dividend Yield

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There’s plenty of merit in buying dividend kings and queens.

high-dividend stocksBut if you think the game’s about dividend yield and nothing else, you don’t know jack.

Call them Achievers, call them Aristocrats, call them whatever name you want — Wall Street has built a small niche of honoring (and marketing) those stocks that consistently improve dividends for years on end.

Heck, we’ve even gotten in on the act.

But the thing that’s often overlooked when it comes to serial dividend increasers is just how pedestrian most of the dividend yields in the space are.

To wit, only about a quarter of our Dependable Dividend Stocks have a yield above 3%. And 18 of the 53 components actually yield below 2%. Member C.R. Bard (BCR), which has paid out dividends since 1960, yields just a meager 0.62%.

That same dividend profile bleeds over into funds that focus on big baskets of these lauded dividend growers, resulting in modest yields for the most part. So it’d be natural to look at funds with names like the ProShares S&P 500 Aristocrats ETF (NOBL) or Vanguard Dividend Appreciation (VIG), see their sub-2% yields and think, “What’s the point?”

The answer? “Not the dividends themselves.”

You see, when a company is able to steadily increase its dividends for an extended period of time, that speaks to a certain measure of financial stability. And that’s where you get to the value provided by these funds. The focus on prolonged dividend growth isn’t about trying to put together a portfolio of eye-popping dividend yield — it’s about building a fund with high-quality holdings.

Each dividend fund in the space has its own wrinkles, so here’s a look at a few:

Vanguard Dividend Appreciation Index (VIG): This fund currently invests in stocks in the Nasdaq US Dividend Achievers Select Index. It’s the biggest such fund in the space at some $20 billion in assets under management, and it’s also the cheapest at just 0.1% — or $1 for every $1,000 invested — but it’s not actually all that selective. The fund looks for companies that have increased dividends for a minimum of 10 years, which is on the low end compared to its competitors, but that doesn’t mean its holdings are duds: Top holdings such as Johnson & Johnson (JNJ) and Coca-Cola (KO) are paragons of good financial stewardship. Moreover, this is the most diversified of the dividend-growth funds we’ll be discussing here, with 163 holdings currently. VIG yields just 1.9%, however. Read more about VIG here.

SPDR S&P Dividend ETF (SDY): The SDY tracks roughly 100 companies in the S&P High-Yield Dividend Aristocrats Index, which is a subset of S&P 1500 stocks that have improved their dividends for at least 25 straight years — about as good a measure of financial quality as you could want. Top holdings include dividend stalwarts such as AT&T (T) and Consolidated Edison (ED). SDY is a popular fund with $12.7 billion in AUM, and its 2.17% yield is more than VIG’s, but expenses of 0.35% are also higher. Read more about SDY here.

ProShares S&P 500 Aristocrats Index (NOBL): NOBL is composed of S&P 500 Dividend Aristocrats such as Abbott Laboratories (ABT) spinoff Abbvie (ABBV), as well as Walgreen (WAG). Like the SDY, companies must have raised dividends for at least 25 consecutive years, and it also costs 0.35% in expenses. It is a less traveled fund at $260 million, and its yield is less than 2%. However, NOBL’s small roster of just 54 holdings brings up an interesting point. Eli Inkrot, founder of The Currency of Time, makes a compelling case about the cost efficacy of simply buying all the components of a fund like this over time — that the trading fees would end up being cheaper than NOBL’s annual fees after just a few years. Plus, think about it: If these are financially sound companies that you could buy and hold for a long time without worrying anyway, why not save precious basis points? Personally, I prefer the convenience, and not having to monitor 54 stocks in case one of them unexpectedly falls into the abyss … but if you were going to make a case for individual stocks over an ETF, it’d be against the NOBL and its small set of holdings. Read more about NOBL here.

SPDR S&P Global Dividend ETF (WDIV): OK, at least one dividend growth fund actually boasts some attractive yield. The S&P Global Dividend Aristocrats ETF, as you probably guessed, takes a more international approach to this theme, with its 100 companies spanning not just the U.S., but huge swaths of Canada, the United Kingdom and the rest of the world. Like VIG, the WDIV only requires a minimum of 10 consecutive years of dividend growth, but that still gets you invested in big, blue-chip companies such as AstraZeneca (AZN). This is a thinly traded ETF with just $29 million in assets, and expenses of 0.4% are technically the highest in the group. But you’ll more than make up for it with the roughly 4% dividend yield. Read more about WDIV here.

Kyle Woodley is the Deputy Managing Editor of InvestorPlace.com. As of this writing, he was long KO, T and VIG. Follow him on Twitter at @KyleWoodley.


Article printed from InvestorPlace Media, https://investorplace.com/2014/10/aristocrat-dividend-yield-nobl-wdiv-sdy-vig/.

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