If you have invested in any of the FAANG (Facebook, Apple, Amazon, Netflix, Google) stocks then you may have seen your investment devastated over the past 12 months with an average decline of 37% which continues to fall. You may be wondering what to do in a time like this: do you (a) cut your losses and run (b) buy more of the same or (c) perhaps look elsewhere?
Well don’t take the first route – the market will recover and your patience will be rewarded. If you do cut, then do not look at the market prices in 2025 as you will regret it! As for buying more of your FAANG, Dollar-Cost Averaging (DCA) is a good strategy and buying at a time like this can produce a few bargains – however you will have to wait for the market to settle and recover before you start to see any returns.
The third option involves looking elsewhere for a regular, if modest, return. Since the era of unfettered growth seems to be over though, where in the market can we get value? The answer is in dividend stocks. However with companies slashing dividend payments how can we be sure of a reliable return? If only there was a group of companies that pay a regular dividend and are unlikely to cut payments in face of an impending recession…
Fortunately, there is: The Dividend Aristocrats and Dividend Kings. The basic premise is that if a company has 25 years or more of paying an increasing dividend then it ranks as a Dividend Aristocrat; if it manages a similar feat over 50 years then it qualifies as a Dividend King. Certain criteria need to be met prior to achieving either status.
In order to become a Dividend Aristocrat, a company must achieve the following:
- Increase dividend payments for 25 years consecutively
- Be a member of the S&P 500 Index
- Maintain a market cap of $3 billion USD
- Maintain a daily share trade in excess of $5 million daily
The last two mean that only the largest firms can become Aristocrats so there won’t be any supercharged growth with these but we aren’t looking for massive growth – just the sweet dividends that come in on a regular basis.
To invest in these firms you can pick the stocks individually, subscribe to an ETF that invests in these firms or invest in eToro’s @DividendGrowth smart portfolio which has many of these companies contained within.
These companies have fared better than the wider market. YTD the $SPX500 has lost 25.18% whereas in the same time period $NOBL has lost only(!) 16.64%. The fact that these companies are almost guaranteed to pay out dividends means shareholdings are held by institutional and retail investors alike. Dividend Aristocrats tend to outperform during bear markets – and we are currently in a bear market. Conversely Dividend Aristocrats underperform during bull runs.
Do not however make the mistake of believing Aristocrats don’t cut their dividends. The most recent example of this was $T (AT&T Inc) falling from grace. They hung on to their Aristocrat status as long as possible, but in the end they had to relinquish the title. They will be back, but it will be a long time coming – 25 years.
Currently there are 65 Dividend Aristocrats. Most are companies of which most people have heard: $WMT (Walmart Inc.), $MCD (McDonald’s), $KO (Coca-Cola) . Others you might not have heard of, but they are leaders in their fields – $ALB (Albemarle Corporation) and $PNR (Pentair PLC) for example. No sector is left out although notably Technology is the least represented with $ADP (Automatic Data Processing Inc) and $IBM (International Business Machines Corporation (IBM)) being the only two.
One thing Aristocrats have in common are sector Moats, giving a certain advantage that sets them apart from the competition. For instance both $PEP (PepsiCo) and $KO are dividend aristocrats. There are other cola beverages, but can you name one? The last time you went out for a meal did they serve something other than $PEP or $KO?
You could buy an equal amount of each and reap the dividends (that would give you 268 lots of dividends in a year!) or as mentioned you could buy into a curated ETF like the $NOBL . However this only provides 2.18% yield at the time of writing.
Which brings me on to the next piece of information: Not all Dividend Aristocrats are equal though. $WST (West Pharmaceutical Services Inc) has a trailing twelve month (TTM) yield of 0.3% so you won’t get rich by holding a large amount of their shares. The highest yielding aristocrat is currently $VFC (VF Corp) at a whopping 7.04%. Holding equal weights of the top 10 yielding constituents would give you a nice 5.1% return (currently $VFC, $WBA (Walgreens Boots Alliance Inc), $IBM, $MMM (3M), $BEN (Franklin Resources Inc.), $LEG (Leggett & Platt Inc), $O (Realty Income Corp), $FRT (Federal Realty Investment Trust), $TROW (T Rowe Price Group Inc), $AMCR (Amcor PLC) ). However you will lose the diversity that the overall group brings.
Ultimately it is up to you to decide. Do you go for the ease of the $NOBL ETF or pick and weight as you choose? My next article will be on the rarified air of the Dividend Kings.
Update: Since this article was published the S&P Rebalanced the index. There were 3 additions and 0 deletions leaving 68 constituents.
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