Dividend Aristocrats may shine again if the Fed causes another bad year for the stock market

By Philip van Doorn

ETFs holding the Dividend Aristocrats fared well during the down market in 2022, and still-rising interest rates may set up a similar environment for investors

Following a painful 2022 for the S&P 500, when the heavily weighted technology and communications sectors led a double-digit decline, this year's recovery has been breathtaking. But lately, investors have been nervous and those sectors have been pulling back as long-term interest rates have risen, despite the Federal Reserve's pause in raising short-term rates. Some professional investors are worried that rising long-term rates could push the broad stock market down again. And that means it might be time for you to consider more exposure to dividend stocks, which fared quite well during 2022.

Below are screens of the S&P Dividend Aristocrats, broadly defined by three approaches developed by S&P Dow Jones Indices.

Related: Why dividend-growing stocks could be better bets than their higher-yielding peers

Let's start with two charts. All investment returns in this article include reinvested dividends. Here's how the S&P 500 SPX has performed this year, along with its information technology and communications services sectors:

The communications sector is heavily weighted to big tech, as it includes Alphabet Inc. (GOOGL), whose Class A shares have risen 48% this year, and Meta Platforms Inc. (META), which is up 147% for 2023.

To the right of the chart you can see the recent action for the broad market has been weak, with sharp declines for the two sectors.

Now let's move over to exchange-traded funds' performance in 2022 for the SPDR S&P 500 ETF Trust SPY, along with three ETFs that track different groups of S&P Dividend Aristocrats:

The ProShares S&P 500 Dividend Aristocrats ETF NOBL tracks the S&P 500 Dividend Aristocrats Index XX:SP50DIV. This index includes 67 companies in the S&P 500 that have increased their dividend payouts for at least 25 consecutive years when the index is reconstituted and each January. That is the only criterion -- it makes no difference how high or low a stock's current dividend yield might be. The index is equal-weighted, with a 30% cap for any one of the 11 S&P sectors. The index is again rebalanced every April, July and October.The ProShares S&P MidCap 400 Dividend Aristocrats ETF REGL tracks the S&P 400 Dividend Aristocrats Index, which is made up of 47 stocks in the S&P 400 Mid Cap Index MID that have increased dividends for at least 15 straight years. It follows the same modified equal-weighted approach. The SPDR S&P Dividend ETF SDY tracks the S&P High Yield Dividend Aristocrats Index XX:SPHYDA. This index is made up of the 121 Stocks in the S&P Composite 1500 Index that have raised dividends for at least 20 consecutive years. The S&P Composite 1500 is a combination of the S&P 500, the S&P Mid Cap 400 and the S&P 600 Small Cap Index SML. This means the S&P High Yield Dividend Aristocrats Index includes all the stocks in the S&P 500 Dividend Aristocrats Index, but it excludes some that are in the S&P 400 Dividend Aristocrats Index. The name of the High Yield Dividend Aristocrats Index is confusing because the yields may not be high -- they range from 0.20 % to 9.13%.

Here's how the three Dividend Aristocrat ETFs performed, along with SPY, last year:

All three Dividend Aristocrats fared much better than the broad market in 2022, with REGL and SDY holding up particularly well. So far this year, NOBL is flat, while REGL is down 5% and SDY is down 6%.

Screening the Dividend Aristocrats

If we add the three groups of Dividend Aristocrats, which partially overlap as described above, we have a group of 137 stocks. Let's screen them three ways -- by current dividend yield, an analysis of five-year dividend compounding and current sentiment among analysts working for brokerage firms.

Highest-yielding Dividend Aristocrats

A dozen Dividend Aristocrats have current dividend yields of 5.00% or higher:

   Company                            Ticker   Current dividend yield  2023 total return  5-year total return 
   Walgreens Boots Alliance Inc.       WBA                      9.13%               -41%                 -65% 
   Leggett & Platt Incorporated        LEG                      7.47%               -20%                 -30% 
   Nu Skin Enterprises Inc. Class A    NUS                      7.42%               -48%                 -69% 
   NNN REIT Inc.                       NNN                      6.48%               -21%                   1% 
   3M Company                          MMM                      6.42%               -19%                 -46% 
   UGI Corp.                           UGI                      6.27%               -34%                 -49% 
   Realty Income Corp.                  O                       6.19%               -19%                  14% 
   Avista Corp.                        AVA                      5.69%               -24%                 -22% 
   Amcor PLC                           AMCR                     5.43%               -21%                  N/A 
   United Bankshares Inc.              UBSI                     5.34%               -31%                  -8% 
   NorthWestern Corp.                  NWE                      5.25%               -15%                   4% 
   Spire Inc.                           SR                      5.12%               -15%                  -7% 
                                                                                              Source: FactSet 

Click on the tickers for more about each company, ETF or index.

Click here for Tomi Kilgore's detailed guide to the wealth of information available for free on the MarketWatch quote page.

There is no five-year return for Amcor PLC (AMCR) because the company was listed under the current ticker on the New York Stock Exchange in 2019 after it acquired Bemis Co.

Note the weak total returns for all the stocks on the first screen list. A very high dividend yield can be a warning, even for a Dividend Aristocrat, that professional investors aren't confident a company will maintain its payout.

For a second screen, let's consider dividend increases by looking at compound annual growth rates for dividend payouts (CAGR) over the past five years. Let's begin with stocks whose yields were at least 1.5% as of Sept. 27, 2018.

For example, if you had purchased shares of Automatic Data Processing Inc. (ADP) at the close on Sept. 27, 2018, you would have paid $149.91 for your shares. At that time, the quarterly dividend was 69 cents a share, for an annual payout of $2.76 a share. The dividend yield at that time was 1.84%. As of the close on Wednesday, the share price was $242.63 and the quarterly dividend had increased to $1.25, or $5 annually. So the current dividend yield at Wednesday's close was 2.06%, but the yield on your five-year-old shares would be 3.34%. The share price increased 62% over the five-year period and the total return, with dividends reinvested, was 80%. The dividend increased at a CAGR of 12.6% for the five-year period.

If we screen our full list of 137 Dividend Aristocrats for companies whose dividend yields were at least 1.5% five years ago, we narrow the group to 97 companies.

Here are the 10 with the highest five-year dividend CAGR, 13 grew payouts at an annual pace of at least 10%:

   Company                          Ticker   Five-year dividend CAGR  Dividend yield on shares purchased five years ago  Current dividend yield  Dividend yield -- five years ago  2023 total return  5-year total return 
   Lowe's Cos. Inc.                  LOW                       18.0%                                              3.84%                   2.13%                            1.68%                 5%                  98% 
   Microchip Technology Inc.         MCHP                      17.6%                                              4.17%                   2.14%                            1.85%                10%                 110% 
   Williams-Sonoma Inc.              WSM                       15.9%                                              5.50%                   2.29%                            2.63%                40%                 172% 
   Abbott Laboratories               ABT                       12.7%                                              2.79%                   2.14%                            1.53%               -12%                  42% 
   Automatic Data Processing Inc.    ADP                       12.6%                                              3.34%                   2.06%                            1.84%                 3%                  80% 
   Bank OZK                          OZK                       12.5%                                              3.76%                   3.96%                            2.09%                -7%                  13% 
   Fastenal Co.                      FAST                      11.8%                                              4.82%                   2.54%                            2.76%                19%                 116% 
   T. Rowe Price Group               TROW                      11.8%                                              4.43%                   4.71%                            2.54%                -2%                  12% 
   Target Corp.                      TGT                       11.4%                                              5.03%                   4.01%                            2.93%               -25%                  41% 
   NextEra Energy Inc.               NEE                       11.0%                                              4.52%                   3.12%                            2.68%               -27%                  62% 
   L3Harris Technologies Inc.        LHX                       10.7%                                              2.73%                   2.60%                            1.64%               -14%                  15% 

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09-28-23 0839ET

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