Investment newsletters' favorite 'Dividend Aristocrat' stocks
"Dividend Aristocrats" are a long-term strategy, focusing on investment horizons longer than a decade.
High-quality dividend-paying stocks are good bets to beat the 10-year Treasury over the next decade.
This isn't at all obvious, given current yields. The 10-year Treasury is currently yielding more than twice as much (4.9% versus 2.4%) as the S&P 500's "Dividend Aristocrats" - stocks within the S&P 500 SPX that have increased their dividends every year for at least 25 consecutive years. The 10-year would seem to be the far better bet.
The reason it isn't a better bet is that the Aristocrats' dividends will almost certainly grow over the coming decade, while the 10-year Treasury's yield is fixed. If the Aristocrats' dividends grow over the next decade at their average growth rate since 2000, their stock prices don't need to grow very much in order for a portfolio of them to come out ahead.
I calculate that on a price-only basis, they need only grow at a 1.5% annualized rate in order for them to beat the 10-year Treasury over the next decade. Rarely has the Aristocrats' annualized 10-year price-only growth rate been lower than that.
Secret sauce
Though this math supporting dividend stocks' long-term potential is hardly secret, it is sufficiently unknown that Warren Buffett once referred to it as the "secret sauce" behind Berkshire Hathaway's (BRK.B) success. In his 2022 annual report, Buffett provided the following illustration:
"In August 1994... Berkshire completed its seven-year purchase of the 400 million shares of Coca-Cola we now own. The total cost was $1.3 billion... [and] the cash dividend we received from Coke in 1994 was $75 million. By 2022, the dividend had increased to $704 million. Growth occurred every year, just as certain as birthdays. All Charlie [Munger] and I were required to do was cash Coke's quarterly dividend checks. We expect that those checks are highly likely to grow.
"These dividend gains, though pleasing, are far from spectacular. But they bring with them important gains in stock prices. At year-end [2022], our Coke investment was valued at $25 billion."
The only catch, if there is one, is that Buffett's approach is a long-term strategy - focusing on investment horizons longer than a decade. There's no assurance that the average Dividend Aristocrat will beat the S&P 500 over shorter horizons. This has certainly been the case over the past decade, as you can see in the above chart of an ETF benchmarked to the Dividend Aristocrats (blue line) compared to one tied to the S&P 500 (purple line).
But which Dividend Aristocrats?
An ETF is the easiest, quickest and cheapest way to invest in a diversified portfolio of Dividend Aristocrats. The one that is most closely benchmarked to the full list of Dividend Aristocrats is the ProShares S&P 500 Dividend Aristocrats ETF NOBL, which has an expense ratio of 0.35%. There are other funds that use slightly different criteria that have lower expense ratios, however. The Vanguard Dividend Appreciation ETF VIG, for example, focuses on stocks that have increased their dividends for 10 consecutive years; its expense ratio is just 0.04%.
For those of you wishing to pick individual Dividend Aristocrats, the table below lists those that are also recommended for purchase by at least two of the investment newsletters tracked by my performance-auditing firm.
Ticker Stock Dividend yield # of monitored investment newsletters recommending
ABT Abbott Laboratories +2.3% 3
APD Air Products and Chemicals +2.3% 3
ADM 3
ES 2
2
KMB 2
2
MDT 2
2
2
2
2
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com
-Mark Hulbert
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