I'd bet that most
Investor Update readers know
about the S&P Dividend Aristocrats Index.
To be included in this index, an S&P 500 company must have
raised its dividend annually for at least the past 25 years.
The standard is brutal: One slip and you're out. Start all
over and compile another spotless dividend track record over
the next 25 years.
This is an index of the bluest of blue-chip dividend stocks.
But I've found a little-known "sister" index that income
investors might find even more interesting...
Strong Appeal for Income Investors
How can you improve on an index that contains some of the
best dividend-payers in history? The S&P's
High Yield
Dividend Aristocrats Index has just the answer.
This index holds companies to the same lofty standard of at
least 25 consecutive years of dividend increases. But it
selects companies from the S&P 1500, which includes
mid-sized and small-cap companies. That means the High Yield
Dividend Aristocrats are put together in such a way as to
balance both growth and income, as opposed to the Dividend
Aristocrats Index, which is focused mainly on income
generation.
The two indices have other important differences as well.
For starters, the plain Dividend Aristocrats Index is
constructed of a shifting number of stocks, all of which
have an equal weighting.
In contrast, the high-yield version is built around a fixed
number of companies -- 50 of them, to be exact. Instead of
being equally weighted, each company is weighted according
to its dividend yield. The companies with the highest yields
exert the most influence on the index's performance.
To prevent a handful of stocks from having too much influence, no one stock can
have more
than a 4% weight in the portfolio. Additional criteria for
inclusion are that the stock must have a market
capitalization of at least $500 million dollars and trade a
minimum of 1.5 million shares in a calendar month.
And
since the High Yield Dividend Aristocrats Index includes stocks
from any of 10 economic sectors, it offers more
diversification than many high-yield indices, which focus
only on securities from traditional income sectors such as
financials and utilities. As of June 30th, four sectors made
up more than two-thirds of the High Yield Aristocrats. The
leading sector was financials (23%), followed by utilities
(16%), industrials (15%) and consumer discretionary (14%).
Not a single energy stock, although the group makes up more
than 13% of the S&P, made the cut for the index.
The High Yield Aristocrats are no slouches when it
comes to returns either. An S&P study showed that
the index outperformed the S&P 500 for a decade in
virtually all types of market conditions. For the 10
years ended June 30, 2009, the index beat the S&P by
nearly five percentage points. For the last five
years, the results have been similar.
It is in bear markets, however, that the role of dividends
in cushioning stock price declines is most important. In
2008, the S&P 500 declined -37%, but the High Yield Dividend
Aristocrats Index was off by just -23% -- a roughly 1,400
basis point improvement.
And in the March to June 2009 quarter, which saw a sharp
rally off a bear market bottom, the index performed
virtually on par with the S&P 500. Both gained nearly +16%
for the period.
In a variety of market conditions, this little-known
index has been able to match -- and usually beat -- the broader
markets, while also paying a higher yield.
Given the relative strength of the High Yield Aristocrats,
owning a share of royalty may not be a bad idea. The easiest
way to invest is to buy the exchange-traded fund
(ETF) designed to mirror its performance, the
SPDR S&P
Dividend (NYSE: SDY). During the past four quarters, SDY
paid $1.88 per share, so it's yielding
about 4.5% at the current prices.
But if you're looking for even higher yields, you might try
some of the individual stocks contained within the actual index.
Good Investing!
Carla Pasternak
Chief Investment Strategist
StreetAuthority High-Yield Investing
P.S. -- In my November issue of
High-Yield Investing I took
a peek inside the High Yield Dividend Aristocrats Index. In
particular, I highlighted one stock that is yielding 6.2%,
but the best part is that this company is poised to grow
earnings +69% in 2010. To learn more, please
visit this link.
