Busting the Myth of the Dividend Aristocrats ETF – Chart of the Day

  • A popular passive income idea is the living on dividend stocks, for example, the “dividend aristocrats ETF”.
  • But the SPDR S&P Dividend ETF fell much more in the crisis than the normal index fund.
  • Is this so bad? What can be the reason?


How performed the Famous Dividend Aristocrats ETF?

One popular passive income idea is making a living with dividends from stocks or stock market investment funds, ETFs. The most famous dividend stock group is the “Dividend Aristocrats”. These are stocks in the American S&P 500 Index paying stable dividends. Increasing its dividend every year – for at least 25 consecutive years. Some of them keep raising payouts for 40-60 years already!

That sounds very cool, it’s the dream of all passive income dividend investors. You buy shares in companies, relax and your annual return increases every year. If you never sell your stocks, and if these companies can indeed increase dividends steadily, everything is all right. But, is this always true? Is your wealth increasing? Also in crisis like this? Let’s observe the chart of the ETF tracking the famous S&P High Yield Dividend Aristocrats Index, the SPDR S&P Dividend ETF (SDY). We compare it with the “normal” SPDR S&P 500 ETF (SPY), tracking the common S&P 500 index.

Chart: SPDR S&P Dividend ETF (SDY) (Tracking The S&P High Yield Dividend Aristocrats Index) and the SPDR S&P 500 ETF (SPY). 12 Months.
Chart: SPDR S&P Dividend ETF (SDY) (Tracking The S&P High Yield Dividend Aristocrats Index) and the SPDR S&P 500 ETF (SPY). 12 Months. (Tradingview.com)

Alarming Messages about Dividend Stocks

The “normal” ETF tracking the S&P 500 index, the SPY surged 1,71 percent in the last 12 months. (The index itself, 1,75 percent.) The same time, the dividend aristocrat ETF SDY fell 12,16 percent. Strange. The SDY has a theoretical dividend yield of approximately 3.2 percent this week. This explains a small part of the difference. But even so, SDY has underperformed approximately nine percent on annual basis. Previously, I would have guessed that dividend stocks would perform better than the market as a whole. Because in a crisis, investors are looking more for stocks that provide stability, incomes. But this is not the case this spring.

If you read stock market news, you may have noticed that many companies have reduced, postponed, or canceled their dividend payments. Not only in troubled sectors like tourism, airlines, restaurants, oil sector or event management. The same by industrial companies, retail chains, clothing companies, parts of the entertainment industry, advertising related to sports etc. Many sectors are in trouble. That may weight on the dividend aristocrats – some of them may be dropped of the dividend aristocrats ETF. For example, in the energy, industry, materials sectors. We ‘ll see.

Are Dividend Aristocrats ETFs Better in the Long Term?

Another reason why dividend aristocrats ETF fell more than the normal SPY ETF is that it is a defensive investment. Defensive stocks can provide you a nice passive income, a stable return in long bear markets. (That means, in long stock market downtrends.) But in a bull market, in a stock market uptrend, growth oriented companies surge much more. Speculators preparing for the end of the coronavirus-crisis may buy more growth stocks now than defensive ones. The market is very optimistic, perhaps, too optimistic in the last weeks. (Read more here: Are You Sure You Will Buy Stocks in 2020? – Chart of the Day)

Dividend Coupon By Modderfontein B. Gold Mines Limited - Scan of original
Old dividend Coupon By Modderfontein B. Gold Mines Limited – Scan of original (Public Domain, Wikimedia Commons)

It is important that the almost unlimited quantitative easing announced by the Fed is favorable to dividend stocks. U.S. government bond yields fell sharply during the coronavirus crisis. If bond yields are lower, that increases the value of dividend paying assets. (Although, also the value of all other shares.) If I had a dividend aristocrats ETF in my portfolio, I wouldn’t be very worried about its future. If there were another bottom in the stock market in this crisis, I would still buy more from it. (We should always have cash reserves.)

More Dividend Aristocrats ETFs on the Market

In the long term, in 14.5 years, the SPY surged 133 percent, and the SDY, only 61 percent. But that has a simple reason: The SDY pays quarterly dividends, and that diminishes the price automatically. Some percent every year. By data of Wikipedia and Motley Fool, the S&P High Yield Dividend Aristocrats Index overperformed the S&P 500 index in the long term. (By the way, also the S&P 500 Total Return Index.)

Of course there are a lot of dividend stocks, stock groups and dividend ETFs in various countries. More ETFs are buying the dividend aristocrats portfolio or a similar stock basket. (A list on ETFDB here.) It is also important that in some countries, companies listed on the stock exchanges use to buy back their shares. They spend part of the cash available for dividends in buybacks, instead of dividend payouts. So, the dividend yield of the companies alone can’t tell us all about the stocks. It is only a part of a great picture.



I’m not a certified financial advisor nor a certified financial analyst, accountant nor lawyer. The contents on my site and in my posts are for informational and entertainment purposes and reflecting my collection of data, ideas, opinions. Please, make your proper research or consult your advisors before making any investment or financial or legal decisions.

(Photos: Pixabay.com.)

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