Wednesday, February 13, 2008

Long term returns of S&P high-yield aristocrats versus the S&P 500

In my previous article I discussed the performance of the S&P Dividend Aristocrats.
We found that the list outperformed the S&P 500 index through good and bad years with a significantly lower volatility. The reality is that there is another list with dividend aristocrats generated by the S&P – it’s the High Yield Aristocrats list, which picks the 50 highest yielding stocks in the S&P 1500 index that have increased dividends for at least 25 consecutive years.

The index is weighted by yield, unlike the equally weighted Aristocrats, which accentuates the equity-income characteristics of the index. It was launched recently, and has been “back tested” to a base value of 1000 on December 7, 1999. The High-Yielder’s offer an average 3.91% dividend yield which is more than a percent better than the Regular Dividend Aristocrats average of 2.93%. The index has significantly outperformed the S&P 500 index and even the regular dividend aristocrats since its launch in late 1999. It achieved average annual total returns of 11.61%, versus 8.85% for the regular aristocrats and a meager 2.77% for the S&P 500. I would not expect the list to outperform the major us stock index benchmark every year, since “fashions” on wall-street seem to be changing every couple of years or so. Over the past 8 years, the index has underperformed S&P 500 only 3 times - in 2003, 2005 and 2007. However if you have an investment horizon of at least 15-20 years I believe that you should be able to outperform the market.

If you are a fan of dividend ETF’s, then today is your lucky day. State Street has launched an ETF that’s covering the High Yield Dividend Aristocrats. It’s trading under the ticker SDY. As of 12/31/2007 financials had the highest sector weight in the index, followed by utilities. The ETF has an annual management fee of 0.35%, which is not that bad for a specialized ETF.

My only issues with this index are that it is not equally weighted and that it has been around for only two years or so. There is a tendency for equity research companies to back test past data in order to find an investment solution that could have worked perfectly through a procedure called data mining. It is a little bit suspicious that the index underperformed S&P 500 after it was launched. So if you are intrigued about buying stocks that have shown very good results in the past please remember the “past performance does not guarantee future results” disclaimer and always do your homework before you put your hard earned cash to work.

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