Last week we saw how a $1 million investment in the original Dividend Champions did over the past nine years. Today, we are going to discuss how a similar passive investment in the Dividend Aristocrats at the beginning of 2008 would have done.
S&P 500® Dividend Aristocrats® measure the performance S&P 500 companies that have increased dividends every year for the last 25 consecutive years. The Index treats each constituent as a distinct investment opportunity without regard to its size by equally weighting each company.
I first became fascinated with the list of Dividend Aristocrats in 2007/2008, just as I was beginning my dividend investing journey. This is what I wrote in an article from February 2008:
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“One of my favorite stock lists is the S&P’s Dividend Aristocrats and the S&P High-Yield dividend aristocrats. These lists contain companies which have consistently increased their dividends over the past 25 years, which is a big achievement. These companies have gone through several up and down economic cycles and shown superiority of rewarding their shareholders with increasing payments through dividend growth.”
It made sense that solid blue chip companies, which have managed to grow dividends for 25 years in a row, are worthy of consideration. The requirement to grow dividends for a quarter of a century, or longer, weeds out a lot of the speculative companies out there. This requirement results in a list of quality companies with stable business models, which have withstood the test of time. It didn’t hurt that these companies had done phenomenally for their investors, while showering them with more dividends every year. Getting a rising dividend check, while also generating strong total returns in the process, is one example where you can have your cake and eat it too.
As I gathered a few more years under my belt, I realized that the list of dividend aristocrats is not as complete as the list of dividend champions. One of the drivers behind the change is the requirement to only include companies that are members of S&P 500. Other drivers behind the differences include the minimum market capitalization requirement, as well as the liquidity requirements.
The methodology for inclusion on the S&P Dividend Aristocrats index has also changed over the years. For example, back in 2007 the committee expelled Altria (MO) after its spin-off of Kraft Foods. This was a mistake. However, when in 2013 Abbott split into two companies, the committee kept both new Abbott (ABT) and the spin-off Abbvie (ABBV).
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In addition, there were some inconsistencies in the dividend aristocrats list, where companies like Colgate Palmolive were included in the list in 1989, but eliminated in the subsequent year. The company was not added back to the index until 2011. I have discussed those shortcomings and others in my post on why I believe the S&P Dividend Aristocrats index is an incomplete list for dividend investors.
That being said, when I started the site in 2008, this was the list of companies I used in building out my dividend portfolio. The companies included in the list were of high quality, and made my life much easier because it is much easier to familiarize yourself with 60 companies than 138 in one year.
For the purposes of this exercise, I am going to ignore everything I know today and calculate the returns on an investment in dividend aristocrats at the same time frame as the investment in the original dividend champions. It is always helpful to get back to basics, and see what the data tells me.
1) We are going to assume that we had a $1 million to invest in an equally weighted portfolio of the 60 dividend aristocrats that was posted in December 2007. I obtained the 2008 list of dividend aristocrats a few years ago. You can see the dividend aristocrats list for 2008 from this link.
2) We are making the assumption that this investment was done in a tax-deferred account, and that our millionaire investor paid nothing in commissions. This was not that difficult to accomplish a decade ago, and is even easier to accomplish today.
3) We are also assuming that dividends are accumulated in cash throughout the year, and reinvested at the end of the year. This assumption is easier to make, when you have so many calculations to perform by a one-person operation. We are also assuming that the investor did not sell even after dividend cuts, but kept holding and reinvesting their diminished amount of dividends.
4) We are going to assume that this investor was as passive as it gets. The investor didn’t perform any fundamental analysis of any sort. This investor didn’t look at valuations, or whether the dividend was even safe. They simply created an equally weighted portfolio of dividend aristocrats at the beginning of 2008, reinvested dividends, and did as little as humanly possible.
5) We made the following assumptions for corporate changes:
- If a company was acquired for stock, the passive dividend investor obtained shares in the acquirer.
- If a company was acquired for cash and stock, the passive dividend investor obtained shares in the acquirer, and then reinvested any cash proceeds in additional shares of the acquirer.
- If a company was acquired for cash by an acquirer whose stock is publicly traded in the US, the investor simply exchanged their cash for shares in the acquirer. If the acquirer was a privately held company, or it was not traded on US exchanges, I assumed that our investor simply purchased shares in S&P 500 index fund using a low cost ETF from iShares (IVV).
- The data, calculations and assumptions from my last post were exclusively leveraged for this article.
The results are strikingly similar to those for the Original Dividend Champions from 2007.
A $1 million investment in the Dividend Aristocrats at the very beginning of 2008 would have turned to $2,219,423 million by the end of 2016.
The annual dividend income decreased from $30,270 in 2008 to $25,533 by 2009. The destructive force of dividend cuts was not felt until 2009. After hitting the lows in 2009 however, dividend income increased all the way to $48,743 by 2016.
The original $1 million investment in dividend champions from the beginning of 2008 was worth $2.255 million by the end of 2016. The annual dividend income of the original dividend champions portfolio rose from $31,740 in 2008 to $47,190 by the end of 2016.
A similar investment in S&P 500 would be worth $1.96 million by the end of 2016. The annual dividend income rose from $19,250 in 2008 to $38,690 by the end of 2016. The passive dividend growth strategies resulted in higher capital gains and higher dividend incomes for the patient investor.
The most surprising fact for me was that someone who had followed the dividend aristocrat index each year, would have turned $1,000,000 at the beginning of 2008 to $2,580,000. This strategy would have essentially sold companies when they cut dividends, and would have purchased shares in the new additions to the dividend aristocrats index. In addition, this strategy would have also rebalanced every single quarter.
The annual dividend income from the dividend aristocrat index portfolio would have grown from $25,400 in 2008 to $64,300 by 2016.
Out of the 60 dividend aristocrats at the end of 2007, only 32 remain as dividend aristocrats today. Seventeen companies ultimately cut dividends to their shareholders. Eight companies were acquired. The remaining three companies simply froze dividends ( kept them unchanged), which is what led to them being booted off the index. None of the companies failed outright during our study period.
The 2007 list of dividend aristocrats included 14 financial companies, 11 of which ended up cutting dividends during the financial crisis. A full 23% of the index was in financials, and this was the sector that got obliterated during the financial crisis. Despite the concentration of dividend cuts in the financial sector that we saw during the global financial crisis, this portfolio did pretty well for the investor who stayed the course. You should present this article next time someone is using dividend cutters such as Bank of America (BAC) to scare you out of dividend investing.
Dividend growth investing rocks.
- Investing in the Dividend Champions from 2007
- Where are the Original Dividend Champions today?
- Where are the original Dividend Aristocrats now?
- Dividend Aristocrats List for 2017
- Historical changes of the S&P Dividend Aristocrats
Article by Dividend Growth Investing