Introduction
Dividend growth strategies remain popular among investors due to their emphasis on companies that consistently increase dividend payouts, offering a blend of income and capital appreciation. Firms committed to dividend growth typically demonstrate financial stability and robust cash flows, which tends to translate to providing reliable income. Furthermore, their increasing dividends have historically often outpaced inflation, helping to preserve purchasing power.
In addition to income, dividend growth strategies provide equity participation, historically providing strong long-term returns. Reinvesting dividends can significantly compound returns over the long term, appealing to those focused on total return. Additionally, since these strategies tend to track higher-quality companies, they have historically exhibited defensive characteristics, including lower volatility and drawdowns.
Launched in November 2005, the S&P High Yield Dividend Aristocrats (S&P HYDA) is a prominent dividend growth index, with nearly 20 years of live history. The index tracks stocks in the S&P Composite 1500® that have consistently increased their total dividends per share every year for at least 20 consecutive years. The index universe covers large-, mid- and small-cap stocks in the U.S. equities market. This paper focuses on the S&P HYDA, examining its characteristics, risk/return profile and performance attribution.
Regular Income that Preserves Purchasing Power
Dividend strategies are popular for several reasons, particularly their ability to provide a regular income stream. One key consideration when evaluating a dividend strategy is the potential for payouts to preserve purchasing power. While dividends can potentially offer a degree of protection against inflation, their effectiveness is influenced by various factors, such as the type of company and the consistency of dividend growth. Historically, companies included in the S&P HYDA, which have a track record of increasing their dividends for at least 20 consecutive years, have grown at a rate that exceeds inflation, therefore showing their potential to help investors maintain purchasing power.
