EXECUTIVE SUMMARY
- Dividends play an important role in generating equity total return. Since 1926, dividends have contributed approximately 32% of total return for the S&P 500, while capital appreciations have contributed 68%. Therefore, sustainable dividend income and capital appreciation potential are important factors for total return expectations.
- Companies use stable and increasing dividends as a signal of confidence in their firm’s prospects, while market participants consider such track records as a sign of corporate maturity and balance sheet strength.
- The S&P 500 Dividend Aristocrats is designed to measure the performance of S&P 500 constituents that have followed a policy of increasing dividends every year for at least 25 consecutive years.
- The S&P 500 Dividend Aristocrats exhibits both capital growth and dividend income characteristics, as opposed to alternative income strategies that may be pure yield or pure capital-appreciation oriented.
- Over the long term, the S&P 500 Dividend Aristocrats exhibited higher returns with lower volatility compared with the S&P 500, resulting in higher risk-adjusted returns.
- As of 2023, S&P 500 Dividend Aristocrats constituents included 66 securities, diversified across 10 sectors (see Exhibit 13 in the Appendix).
- The constituents have both growth and value characteristics.
- The composition of the S&P 500 Dividend Aristocrats contrasts with that of traditional dividend-oriented benchmarks that have a steep value bias and have high exposure to the Financials and Utilities sectors. At each rebalancing, a 30% sector cap is imposed to ensure sector diversification.
- The S&P 500 Dividend Aristocrats follows an equal weight methodology.
- This treats each company as a distinct entity, regardless of market capitalization.
- This also eliminates single stock concentration risk.
INTRODUCTION
Dividends have interested market participants and theorists since the origins of modern financial theory. As such, many researchers have investigated the various topics related to dividends and dividend-paying firms. Previous studies by S&P Dow Jones Indices have shown that over a long-term investment horizon, dividend-paying constituents of the S&P 500 have outperformed the non-payers of dividends and the overall broad market on a risk-adjusted basis.
In recent years, the increasing amount of academic and practitioner research demonstrates that dividend yield is a compensated risk factor and has historically earned excess returns over a market-cap-weighted benchmark. When combined with other factors such as volatility, quality, momentum, value and size, dividend yield strategies can potentially offer exposure to systematic sources of return.
In this paper, we show that dividend yield is an important component of total return. We also highlight pertinent characteristics of the S&P 500 Dividend Aristocrats, an index that seeks to measure the performance of the S&P 500 constituents that have increased their dividend payouts for 25 consecutive years. We show that the S&P 500 Dividend Aristocrats has historically possessed desirable risk/return characteristics, offering higher risk-adjusted returns and downside protection than the broad-based benchmark. In addition, our analysis shows that the S&P 500 Dividend Aristocrats is sector diversified and displays growth and value characteristics.
