10 High-Yield Dividend Aristocrats Perfect For An Uncertain Market

seekingalpha04-20

Volatility in the stock market is normal and healthy, with average yearly gains of 22% in positive years and average peak intra-year declines of -14%.Dividend aristocrats, which have lower volatility ...

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Since 2007, they have fallen 50% less than the S&P during bear markets.They historically delivered 10% returns that analysts think will likely continue, along with 9% to 10% annual income growth.Consider adding some bonds and managed futures for those seeking even lower volatility. Low volatility + bonds/managed futures fell just 12% during the Great Recession, less than 25% of the S&P's decline and 72% less than a 60-40 retirement portfolio.   peshkov While volatility has been very low this year, it's starting to pick up again. YCharts Don't get me wrong. The kinds of declines we've seen in US stocks and even dividend aristocrats are perfectly normal, healthy, and to be expected. Why You Should Embrace Volatility As Normal And Healthy You might be surprised to learn the following facts about US stocks.  Stocks are up 75% in all years. Average yearly gain in a positive year: 22% Average year loss in a down year: 14% Average Peak intra-year decline: -14%  JPMorgan Asset Management  In other words, if you own stocks, and they go up, they go up more than 20% on average. And the average long-term returns have been over 10% per year. Ritholtz Wealth Management  But that cost is a 14% average decline in any given year. Every single time there is some story the media and investors tell themselves. Permanent Wealth Partners  The Wall of Worry is the list of bad things that MIGHT potentially happen to fundamentals, which drive 97% of long-term stock returns. Returns like these. Ritholtz Wealth Management  For anyone who wants to build generational wealth—for themselves, their children, their grandchildren, or charitable foundations—the ability to compound inflation-adjusted wealth at 7% per year is priceless.  2X increase in real wealth every decade. Over centuries, that can add up to more than 2 million X returns, turning $1,000 into $2 billion.  Daily Shot Recently, many investors felt uncomfortable because markets were at all-time highs. This year alone, we've had 23 record highs. Ritholtz Wealth Management  You might be surprised that investing at all-time highs historically delivers slightly better returns for the next five years. But think of it this way. Stocks are driven by sales, earnings, cash flow, and dividends, which are the things that create intrinsic value for investors. And fundamentals are doing well in a healthy economy like we have today. 2 Great ETFs For A 'Hot Landing' Economy   X Today's wall of worry is among the best I've seen in years.  The \"Hot landing\" economy is so good that inflation might rise. Causing the Fed to not only not cut, but possibly hike more.  In his annual letter, Jamie Dimon discusses JPMorgan's (JPM) readiness for interest rates of 2% to 8% in the next few years. Mr. Dimon is just being honest; the range of potential interest rate scenarios his economists are showing him through their models and Monte Carlo simulations is wide enough to drive a truck through. Because there are also some very smart economists, like those at Citigroup, that think the Fed might cut as much as 50 basis points in June because we're headed for a recession this year. Jeremy Grantham of GMO thinks the recession is coming next year, as high inflation finally exhausts poorer Americans, who have run out of Pandemic stimulus cash and have been borrowing on credit cards at record rates of almost 22%. So respected economists (including those at Apollo Global Management) say no cuts. Some, like those at JPMorgan, think the Fed might have to hike as high as 8%. Some, like Citi and GMO, think that rates could soon fall by 3.25% because of the recession.  There is no Ground Hog Day when all the economists come out from the tunnel and declare the recession is over. They have a retroactive, seasonally-adjusted Ground Hog Day... “I didn't spend any time predicting the economy, or the stock market. I spent all my time looking at companies.” - Peter Lynch  So how can you find the best sleep-well-at-night dividend stocks for a potential correction, knowing that any correction will be normal and healthy, probably end faster than we expect, and be followed by a solid recovery? Dividend Aristocrats: Cranking Low Volatility Up To 11 S&P Global The aristocrats don't beat the market over time by outperforming growth stocks, but by falling less during the inevitable downturns. The 60-40 retirement portfolio is famous for its lower volatility and, thus, the gold standard for retirement planning. Since 2007 Portfolio Visualizer Premium  Since 2007, the 60-40 has captured 80% of the market's downside, just like the dividend aristocrats. However, it only captured 70% of the market's upside, while aristocrats captured 90%. I'm not saying the aristocrats are an ideal replacement for the 60-40 (see risk section), but let's use a thought experiment. If the aristocrats offer better returns/units of downside volatility, what if we searched for the lowest volatility aristocrats trading at reasonable prices today? How To Find The Lowest Volatility Aristocrats Trading At Reasonable Prices Today           Screening Criteria Companies Remaining % Of Master List   1 Add \"12 months fundamentally justified upside, and dividend growth streak and annual volatility\" Under \"Columns.\"   0.00%     Under \"Lists,\" dividend champions 132 26.77%   3 BHS Rating \"reasonable buy, good buy, strong buy, very strong buy, ultra value buy\" 87 17.65%   6 Sort by volatility 43 8.72%     Use \"ticker\" to create a 10-ticker watchlist of the lowest volatility aristocrats trading at fair value or better. 10 2.03%   Total Time 1 minute       Click to enlarge Usually, I would add screens like credit ratings and long-term return consensus; however, when I checked the fundamentals for the ten lowest volatility aristocrats, I found them impressive enough. Let me show you why. The 10 Lowest Volatility Aristocrats Trading At Fair Value Or Better Dividend Kings Zen Research Terminal Let's consider the average fundamentals of these ten dividend aristocrats. 3.1% yield is more than 2X the S&P's yield and on par with Vanguard High Dividend Yield Index Fund ETF (VYM). The average annual volatility is 16.5%, barely more than the S&P's 15% (for 500 companies) and the average aristocrat's 24%.  The average stand-alone company has a 28% average annual volatility. This means the stock goes up or down 28% even if the fundamentals aren't broken.  The safety score is 97%, an Ultra Sleep Well At Night level of dividend safety, implying around 1.15% risk of dividend cuts during even a severe recession like the Great Recession or Pandemic crash. According to S&P, the average credit rating is A—, with 2.6% 30-year bankruptcy risk and an average dividend growth streak of 50.4 years. This portfolio is a dividend king portfolio with an average dividend growth streak stretching back to 1974. Seven recessions since 1974, including two of the worst economic catastrophes since the Great Depression. S&P's long-term risk management model includes over 1,000 metrics, including everything from interest rate management to brand management risk to R&D efficiency and corporate culture resiliency. S&P rates these ten aristocrats as 70th percentile, meaning 30% of all global companies. And for all this incredible quality and dependability? For A-rated balance sheets and world-class risk management, you can buy these companies at a 12% historical discount, while the S&P trades at a 3% historical premium. That translates to a 17% 12-month total return potential.  If these companies grow as analysts expect and return to historical fair value within 12 months, investors would expect 17% returns. It is not a forecast, but what level of returns would be sanctified by the righteousness of fundamentals as best as analysts understand them today?  Long-term analysts expect 6.5% long-term EPS and dividend growth, meaning that if you live off dividends, you can expect a 3.1% yield today and 6.5% long-term income growth potential, and if you reinvest dividends, you can expect almost 10% income growth. The 60-40 historically delivers 7% annual returns and 8+ % returns for low-volatility defensive sectors like utilities and consumer staples, which are considered good. These ten low-volatility aristocrats offer almost 10% of the market's historical return potential at a 12% discount for A-rated balance sheets and a very low-risk 3.1% yield today. With 17% fundamentally justified upside to fair value in the next year. And long-term return potential of 9% to 10%, making this group of companies ideal for whatever is coming next for the stock market and economy. Here's more proof. Historical Returns Since 2007 Portfolio Visualizer Premium  The average volatility of all ten aristocrats together since 2007 was under 12% for a pure stock portfolio. The 60-40's annual volatility with 40% bonds was 12.4%. Portfolio Visualizer Premium  These ten aristocrats have almost matched the S&P's average rolling returns while suffering far less volatility, including falling half as much during the second-worst stock market crash in history, the Great Recession. Portfolio Visualizer Premium  These low-volatility aristocrats captured just 60% of the market's upside but 45% of the downside, which is why they could match the market's returns for 17 years while delivering 17.85% excess return per unit of volatility (Treynor ratio). 80% better than the S&P 500. 9.3% Income Growth For 17 Years Portfolio Visualizer Premium  A 60-40, or any mixed portfolio with stocks, bonds, and alternatives, will have naturally variable income. These ten aristocrats grew their income in high single digits, just like analysts expect in the future. The 60-40's income growth? 2% per year, or about 5X slower. What about even more historical data? Historical Returns Since 1996 Portfolio Visualizer Portfolio Visualizer  The same level of returns and even more impressive consistency of returns. While the S&P had lost decades during this period, the worst these aristocrats suffered was a flat return for three years. Portfolio Visualizer  These ten low-volatility aristocrats delivered remarkable low-volatility and consistent solid returns and income growth. 9.2% Income Growth For 26 Years  Portfolio Visualizer  But you don't have to wait decades to experience solid returns from these ten dividend aristocrats. 2026 Consensus Total Return Potential  Not a forecast. If and only if earnings grow as expected and valuations return to 10-year averages, these are the returns you would expect. Based on current consensus estimates, the returns would be sanctified by the righteousness of fundamentals.  Coca-Cola (KO) FAST Graphs, FactSet Johnson & Johnson (JNJ) FAST Graphs, FactSet PepsiCo (PEP) FAST Graphs, FactSet Procter & Gamble (PG) FAST Graphs, FactSet Consolidated Edison (ED) FAST Graphs, FactSet McDonald's (MCD) FAST Graphs, FactSet Atmos Energy (ATO) FAST Graphs, FactSet Kimberly-Clark (KMB) FAST Graphs, FactSet Diageo (DEO) FAST Graphs, FactSet MGE Energy (MGEE) FAST Graphs, FactSet  Average 12-month fundamentally justified return potential: 17% Average three year-return potential: 37% = 11.1% annually  Risks To Consider Let me be clear that low volatility doesn't mean no volatility. Portfolio Visualizer Premium  A 25% decline in the Great Recession sounds great compared to the S&P getting cut in half. But it didn't feel great for those suffering those declines. Portfolio Visualizer Premium  How about an 11% decline in a single month for a low-volatility portfolio? The S&P fell 15%, but that's still pretty painful. Why did Pepsi fall 28% in a single month? I don't know the headlines that scared investors back then, but I can bet you that if Seeking Alpha had existed, you'd have many bears screaming that PEP was not a \"low volatility stock.\" And let's not forget that stocks are not bond alternatives. YCharts JNJ fell 5% on March 16th, 2020, the 3rd worst day in S&P history. So, does that mean it's not a low-volatility stock? No, the S&P fell 12% that day. But do you want something that goes up in a market crash? That's where bonds usually shine. And when bonds and stocks fail because stocks crash due to interest rates soaring? That's where managed futures shine.               Crisis Period US Stocks Bonds Long Bonds Cash RSBT DBMF KMLM 50/50% Long Bonds And KMLM   December 2021 to September 2022 -25% -14.4% -44.8% 0.6% 28.7% 31.6% 44.8% 0.0%   January 2020 to March 2020 -20% -2.6% 20.3% 0.3% 0.3% -0.8% 13.9% 17.1%   October 2007 to February 2009 -50% 6.1% 24.0% 2.5% 25.9% 13.5% 37.4% 30.7%   August 2000 to December 2002 -41% 33.4% 149.6% 11.2% 78.6% 28.8% 30.4% 90.0%   Average -34% 5.6% 37.3% 3.6% 33.4% 18.3% 31.6% 34.5%   Median -33% 1.8% 22.2% 1.5% 27.3% 21.2% 33.9% 23.9%   Click to enlarge (Source: KraneShares, Charlie Bilello, YCharts, Soc Gen) Adding 33% Bonds/Managed Futures To These Low Volatility Aristocrats Since 2007 Portfolio Visualizer  Similar returns but much lower volatility and a peak decline of just 12% during the Great Recession. Portfolio Visualizer  You can't get something for nothing; hedges will reduce long-term returns. But if a 12% peak decline in the Great Recession keeps you from panic selling, it's likely worth the tradeoff. Historical Bear Markets Since 2000 Portfolio Visualizer  With the correct asset allocation, you can create a portfolio with modest gains that might average positive returns in bear markets, though not necessarily in every market. Portfolio Visualizer Portfolio Visualizer  Bottom Line: Make Peace With Volatility To Win Peace Of Mind With Your Portfolio The historical data is clear: volatility is good, and we should all embrace it as we would a lover. But humans aren't machines; we don't live by spreadsheets. We're emotional beings, often stupid, irrational, and prone to speculation. There are two times in a man's life that he should not speculate. When he can afford to and when he can't.\" - Mark Twain That's where the low-volatility nature of dividend aristocrats and these ten lowest-volatility aristocrats can be useful. The first rule of compounding: Never interrupt it unnecessarily.” - Charlie Munger Whatever helps you avoid the mistake of panic selling during inevitable corrections is a reasonable and prudent tool to consider. Remember, the ultimate goal of all investors is not to maximize volatility-adjusted returns or any other fancy metric.  It's to harness the genius of global capitalism to live your dreams. And that's something these aristocrats might help you do.","kind":null,"is_publish_news":null,"is_publish_highlight":null,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.22.4","shortVersion":"4.22.4","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2428628945"}