For Discerning Investment Returns, Look to the S&P 500’s Aristocrats

Living in London, and with my office across the park from Buckingham Palace, I am near ground zero when it comes to British aristocracy.

Despite the royal location, I do not make it a daily habit to have tea at the Ritz Hotel with the local English gentry.

Instead, I prefer another kind of “aristocrat” when investing money for my clients and recommending stocks to my newsletter subscribers.

The “aristocrats” I like to rub elbows with are the kind you’ll find in the S&P 500 Index, specifically those you find in the S&P Dividend Aristocrats Index.

Launched in 2005, Standard & Poor’s developed the index as a way to mimic an investment strategy that some sophisticated dividend investors had been employing successfully for decades.

As its name implies, the Dividend Aristocrat’s strategy is unabashedly elitist. It invests only in dividend stocks with the most noble and unblemished bloodline of ever-increasing dividends.

Specifically, to be a Dividend Aristocrat, a stock has to meet two requirements.

First, it must be a member of the S&P 500.

Second, it must have a history of at least 25 years of increasing annual dividends.

The current tally of S&P 500 companies meeting both of these requirements is 54.

And as you might expect, there are some very familiar, large-cap dividend stalwarts in the mix, such as AT&T (T), Procter & Gamble (PG) and Walmart (WMT).

Performance Fit for Royalty

The Dividend Aristocrat strategy is based on the premise that buying large-cap stocks with decades-long track records of increased payouts will deliver investors total returns that exceed those of just “buying the market” with an S&P 500 Index fund.

In fact, this is exactly what you get with the Dividend Aristocrats.

Year to date through Dec. 15, the S&P 500 Dividend Aristocrat Index has posted a total return of 11.95%.

By comparison, the S&P 500 Index has delivered investors a total return of 9.78%.

This performance gap between “commoner” stocks in the S&P 500 and the “noblemen” stocks in S&P 500 Dividend Aristocrat Index actually is both lengthy and consistent.

Over the past three years, the Aristocrats returned 21.4% while the S&P 500 has generated a total return of 20.4%.

That’s not much of a performance gap, even though it is in favor of the Aristocrats.

But extend that performance back five years and 10 years, and the difference is pronounced.

The average, great unwashed stocks of the S&P 500 have a five-year average total annual return of 14.8% and a 10-year total return of 7.36%. In contrast, the Aristocrats have a five-year total average annual return of 17.4% and a 10-year total return of 10.3%.

That gap of 3% per year is remarkable.

Source: Indexology

Standard & Poor’s just published a chart on the relative outperformance of the Aristocrats vs. the S&P 500 since 1990.

With that kind of record of outperformance, dumping a mainstream, S&P 500 Index fund in favor of a portfolio of Dividend Aristocrats is a no brainer for both my subscribers and my clients.

A Noble Solution

Given the consistent, impressive outperformance of the Dividend Aristocrats, the next question for the individual investor is: How can I buy that index?

While there are a couple of ways to do this, I personally invest in this noble set of stocks through the ProShares S&P 500 Dividend Aristocrats ETF (NOBL).

NOBL (a clever ticker symbol, indeed) is an exchange-traded fund (ETF) that invests specifically in the S&P 500 Dividend Aristocrats. It is the only ETF that invests exclusively in the companies that constitute this index.

The 54 companies in this ETF are equally weighted. They are also diversified across a variety of sectors such as consumer staples, consumer discretionary, industrials, materials and many others.

Unlike many dividend-oriented ETFs, NOBL does not have the majority of its exposure in financial, telecom or utility stocks. In fact, the fund’s charter prohibits any single sector from making up more than 30% of its holdings.

With an expense ratio of just 0.78%, the cost to own the Aristocrats Index is like a glass of fine wine — expensive, but worth it. And it’s also well within the reach of a pedestrian investor.

For income-oriented investors, the fund’s 2.3% yield (as of Sept. 30) bests both the 10-year Treasury note’s current yield of 2.1% and the S&P Index’s yield of 1.8%.

The bottom line?

If you want to put the investment power of the Dividend Aristocrats to work in your investment portfolio, then ProShares S&P 500 Dividend Aristocrats ETF (NOBL) is a fantastic way to guarantee yourself noble returns.

In case you missed it, I encourage you to read my e-letter column from last week about how following trends could net big returns. I also invite you to comment in the space provided below my Eagle Daily Investor commentary.