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Use Dividend Stocks And ETFs To Augment Long-Term Returns

Long-term investors should use high-quality dividend stocks and ETFs. Dividend stocks provide greater total returns, with dividend reinvestment, over the long term. While high dividends are nice, investors should also focus on high quality. Over the long term, high-quality, dividend-paying stocks and exchange-traded funds could produce outperforming results. Stocks with high dividend yields are the best way for investors to buy income in the current market, and if the positions are held over the long haul through short-term volatility, one may find the investment outperforming the overall market on a total return basis, writes Philip van Doorn for MarketWatch . For instance, the S&P 500 Dividend Aristocrats, which tracks over 50 stocks that have raised their dividends annually over at least 25 years, has outperformed the S&P 500 over long periods. Over the past 10 years, the S&P 500 Dividend Aristocrats have generated a 178% total return, with dividends reinvested. In contrast, the S&P 500 index has returned 117% over the same period. ETF investors can also track the S&P 500 Dividend Aristocrats through the ProShares S&P 500 Aristocrats ETF (NYSEArca: NOBL ) . NOBL has increased 11.4% over the past year, compared to the 10.4% gain in the S&P 500. The ETF also comes with a 1.62% 12-month yield. Additionally, research has found that high-quality, high-dividend stocks tend to outperform and produce better risk-adjusted returns. For instance, Chris Brightman, Vitali Kalesnik and Engin Kose found that among the largest 1,000 U.S. companies, a smaller group of 100 high-yield, high-profitability companies generated the highest total returns with the lowest volatility from 1964 through 2014. Brightman, Kalesnik and Kose also screened for quality, or distress risk, and accounting red flags, and found that the high-quality firms typically outperformed low-quality businesses. However, investors had to give up some dividend growth rates when picking high-quality companies. Investors can also track high-quality, high-dividend stocks through ETF options. For instance, the iShares Core High Dividend ETF (NYSEArca: HDV ) , which tracks high-quality U.S. companies that have been screened for financial health and relatively high dividends, has a 12-month yield of 3.40%. The Vanguard High Dividend Yield ETF (NYSEArca: VYM ) targets the largest and highest dividend-paying stocks and comes with a 2.84% yield. VYM does not sacrifice quality for its quest for yield. Instead, the ETF includes a blend of both approaches and includes about 50% of its assets in stocks with wide economic moats, according to Morningstar . Max Chen contributed to this article . Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Own The Strongest Dividend Growers With This ETF

Summary Dividend aristocrats, or blue-chip companies that consistently raise their dividends, tend to outperform the broader market over long periods. Dividend increases are positive predictors of future corporate performance. Dividend aristocrats are unique due to the fact that most companies are unable to increase dividends when facing business cycle downturns and capital market shocks. By offering consistently increasing payouts on a long-term basis, dividend aristocrats act as a hedge against economic uncertainty and provide downside portfolio protection. Dividend aristocrats, or blue-chip companies that consistently raise their dividends , tend to outperform the broader market over long periods. To be considered a dividend aristocrat, a company must typically have raised its dividend for at least 25 consecutive years. Dividend aristocrats are unique due to the fact that most companies are simply unable to continually boost dividend payouts when facing business cycle downturns and capital market shocks. Dividend increases are positive predictors of future corporate performance. By offering consistently increasing payouts on a long-term basis, dividend aristocrats act as a hedge against economic uncertainty and provide downside portfolio protection. The ProShares S&P 500 Dividend Aristocrats ETF (NYSEARCA: NOBL ) tracks the S&P 500 Dividend Aristocrats Index, which only includes companies that (1) are members of the S&P 500 and (2) have increased their dividends for at least 25 consecutive years . If an existing member cuts, or even freezes its dividend, it is dropped from the index. Rebalancing takes place quarterly with an annual reconstitution, taking place during the January rebalance. Only the very best dividend payers are permitted to remain in this elite club. (click to enlarge) What should excite you about NOBL is the fact that the vast majority of companies that comprise this ETF have raised their dividends during some tough times, including the financial crisis of 2008. I don’t know about you, but I find this kind of financial strength and predictability intoxicating, in fact, almost irresistible. The 53 companies in this ETF are equally weighted and they’re diversified across a variety of sectors, such as consumer staples, consumer discretionary, industrials, materials, and many others. Unlike many dividend-oriented ETFs, NOBL does not have the majority of its exposure in financial, telecom or utility stocks, which makes it especially attractive, considering how poorly these stocks perform in a rising interest rate environment. Sector weights are capped at 30% each. NOBL’s current dividend yield is 1.60% and its annual expense ratio is just 35 basis points. An abundance of historical data going back to 2005, when Standard & Poor’s first constructed the S&P 500 Dividend Aristocrats Index, confirms its superior performance over the S&P 500. Over the past 12 months, the S&P 500 Dividend Aristocrats ETF has produced a total return of 17.82% vs. 14.92% for the SPDR S&P 500 Trust ETF (NYSEARCA: SPY ): (click to enlarge) Conclusion The S&P 500 Dividend Aristocrats Index is made up of some of the highest-quality, income-producing stocks available to investors today. Even if you are a risk-averse investor, you may still find NOBL to be an attractive core holding since it’s comprised of companies with stable earnings which produce less volatile returns. NOBL held up better than the S&P 500 during the last bear market. The Aristocrats Index lost -22% during the 2008 financial crisis while the S&P 500 Index fell -37%. NOBL, since late January, is outperforming many “defensive” funds, most of which typically hold utility companies. The Dow Jones Utility Average (DJUA) peaked on January 29th at 652. Now at 600, the DJUA has lost -8% while NOBL has gained +3%. Another potential benefit, because of NOBL’s very small exposure to the Utility sector, would likely be outperformance over most other dividend-paying funds in a rising interest rate environment . You may not be aware of the fact that the 10-year Treasury bond has risen from 1.67% to 2.11% since February 2nd. This move may be a prelude of what’s to come this year. So, bottom line, it may be time to “overweight” NOBL in your investment portfolio. Consider replacing the plain vanilla S&P 500 fund and potentially other “defensive” equity funds in your portfolio with NOBL to enjoy the consistent dividend-paying and defensive attributes of this elite ETF. Additional disclosure: George Kiraly Jr., CFP, MBA is the president of LodeStar Advisory Group, LLC, an independent Registered Investment Adviser located in Short Hills, New Jersey. George Kiraly, LodeStar Advisory Group, and/or its clients may hold positions in the ETFs, mutual funds and/or any investment asset mentioned above. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. Disclosure: The author is long NOBL. (More…) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.

Dividend Aristocrats + Equal Weighting Has Beat Market For 14 Of 15 Years

Summary Two factor tilts from the S&P 500 – the Dividend Aristocrats and Equal Weighting – have historically beat the benchmark gauge. Combining these two indices in equal proportions has beat the S&P 500 in all but one year of the twenty-first century. Strong performance in different market environments helps the combination outperform through the business cycle. In a recent series of articles, I highlighted five strategies for buy-and-hold investors that have historically beat the market. The Dividend Aristocrats , S&P 500 constituents which have paid increasing levels of dividends for at least twenty-five consecutive years, have produced a return profile exceeding the broader market by 2.5% per annum over the past twenty years while exhibiting only three-quarters of the return volatility. The S&P 500 Dividend Aristocrats ETF (NYSEARCA: NOBL ) closely replicates the Dividend Aristocrats. The S&P 500 Equal Weight Index is a version of the S&P 500 where the constituents are equal weighted as opposed to the traditional market capitalization weighting of the benchmark gauge. Guggenheim S&P 500 Equal Weight ETF (NYSEARCA: RSP ) replicates this alternative weight index. When the equal-weighted version of the index is rebalanced quarterly to return to equal weights, constituents which have underperformed are purchased and constituents which have outperformed are reduced, a contrarian strategy that has produced excess returns relative to the capitalization-weighted S&P 500 index over long-time intervals. Equal-weighting also gives an investor a greater average exposure to smaller capitalization stocks, a risk factor for which investors have historically been compensated with higher average returns. Index returns for the Dividend Aristocrats and the Equal Weight Index are detailed below. I compare a 50-50 weight of the two indices versus the total return of the S&P 500. Source: Standard and Poor’s; Bloomberg The Dividend Aristocrats produced a disproportionate amount of their relative excess return versus the S&P 500 in falling markets (see 2002, 2008), and the equal-weighted index produced its relative excess returns in rising markets (see 2003, 2009), combining their return profiles produces a risk profile that exceeds the broader market with less variability of returns . Combining these two strategies in equal proportions has bested the S&P 500 in fourteen of the past fifteen years. Singularly, the Dividend Aristocrats have beat the S&P 500 in eleven of the past fifteen years, and the Equal Weighted Index has beat the S&P 500 in twelve of fifteen years, but combining the two passive strategies in equal proportions has led to even more consistent outperformance. How good has the outperformance of this strategy been? Any active fund manager beating the market for 14 of the last 15 years would have made himself a lot of money. The geometric average return of this strategy (+9.81% from 2000-2014) beat the S&P 500 (+4.24%) by nearly 6% per year while exhibiting lower return variability. Over this historically weak period for stock returns, a dollar invested in this strategy in 2000 would be worth $4.07 today while a dollar invested in the S&P 500 would be worth less than half that figure, just $1.86, even with stocks near all-time highs. Critics of this strategy would point out that from 1990-1999, the S&P 500 outperformed a fifty/fifty mix of the Dividend Aristocrats and the Equal Weighted Index by 2.92% per year. I would counter that this outperformance by the broad market gauge was entirely generated by the S&P 500 returns in 1998 and 1999. High flying returns of tech stocks, which were not represented in the Dividend Aristocrats because of the long tenor inclusion rules, benefited the capitalization-weighted index. These two years marked the peak of the tech bubble, which subsequently unwound itself between 2000 and 2002 when the market produced three negative returns in a row. Taking out 1998 and 1999 from this dataset, and a combination of the Dividend Aristocrats and Equal Weighted Index still outperformed the S&P 500 between 1990 and 1997 (geometric average return of 16.98% vs. 16.63%) with slightly lower variability of returns. I am pretty confident in saying that over the next fifteen years, a combination of the Dividend Aristocrats and the Equal Weighted Index will have lower variability of returns than the broader market. Because the Dividend Aristocrats Index is populated by companies that are able to return increasing levels of cash to shareholders through both the peaks and valleys of the business cycle, this index has lower drawdowns in weak markets. In each of the years that the S&P 500 produced negative returns in this sample period, the Dividend Aristocrats outperformed. Combining the Dividend Aristocrats with the equal weighted index, which tends to outperform the market when it is sharply rising, provides a diversification benefit. If we believe that this strategy will have lower relative risk to the broad market, will this strategy continue to generate excess returns? I believe that the Dividend Aristocrats will produce excess returns when adjusted for their lower risk over long-time intervals. This strategy effectively overweights these high quality companies, capturing the Low Volatility Anomaly , and missing S&P 500 constituents who go out of business. I am sure that some astute readers will note that the Dividend Aristocrats have outperformed the combination with the Equal Weighted Index over the entire dataset. While their risk-adjusted performance will remain strong, I do not expect that low volatility stocks, like the Dividend Aristocrats, will necessarily continue to outperform the broader market on an absolute basis. The Dividend Aristocrats have now outperformed the S&P 500 for six of the past seven years, and the market might be catching up to the idea that lower risk stocks are worth a premium, especially in uncertain market environments and a yield-starved world. Equal-weighting the stock constituents provides an uncorrelated source of alpha. As I have written before, equal weighting the S&P 500 constituents is an alpha-generative contrarian strategy that also more effectively captures the “small(er) cap premium” than the capitalization weighted S&P 500, and I think that this part of the strategy will be an increasing component of its outperformance prospectively. For passive investors who want broad market exposure, understanding that changing your index weightings to a combination that overweights dividend growth stocks and equal weights the broad market benchmark has historically produced higher average returns with lower variability of returns. That’s the alpha we are seeking. Author’s Postscript A previous version of this article has index return data back to 1990. Disclaimer : My articles may contain statements and projections that are forward-looking in nature, and therefore inherently subject to numerous risks, uncertainties and assumptions. While my articles focus on generating long-term risk-adjusted returns, investment decisions necessarily involve the risk of loss of principal. Individual investor circumstances vary significantly, and information gleaned from my articles should be applied to your own unique investment situation, objectives, risk tolerance, and investment horizon. Disclosure: The author is long RSP, NOBL. (More…) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.