Wednesday, May 06, 2020

S&P 500 Dividend Aristocrats Lag In This Down Market

A favorable characteristic of the S&P 500 Dividend Aristocrats is this basket of stocks generally holds up better in broader market pullbacks as seen in the below table. Where the entire row is highlighted, it represents a significant market pullback and the Aristocrats outperformed the S&P 500 Index by double digits. The S&P 500 Aristocrats are companies in the S&P 500 Index that have increased their dividend each year for at least 25 consecutive years. The companies are then equally weighted in the Dividend Aristocrats Index. I have written about the Aristocrats several times in the past with a more comprehensive article at this link.

In the pullback triggered by the virus induced shutdowns on February 19, 2020, the Aristocrats did not hold up better than the broader S&P 500 Index. The below chart compares the Aristocrats return to the S&P 500 Index for various time periods as of April 30, 2020. For the 3-month period ending in April the Aristocrats underperformed the S&P 500 Index by 3.66 percentage points and trail the index by more than 6.00 percentage points for the 12-months ending in April.

Due to the increasing dividend requirement over a consecutive 25 year period, the Aristocrat portfolio ends up with a significant overweight and/or underweight in some sectors. For the three month period ending in April the discretionary sector was the largest detractor from the Aristocrats performance led by no position in Amazon (AMZN). For the one year period, the information technology sector contributed just over 4.00 percentage points to the Aristocrats underperformance. Overall, the information technology sector weight equals 1.5% versus the weight in S&P 500 Index of 22%. Communication services is also a large underweight for the Aristocrats at 2% versus 10% in the S&P 500 Index, not surprisingly Alphabet (GOOGL) was a detractor from relative performance.

The virus led shutdown has certainly had a unique and different impact on companies. With economic activity significantly depressed, companies which one thought might hold up better in an economic slowdown, that has not been the case in this environment. As economic activity resumes, it may be the Aristocrats that outperform since the stock basket is overweight in some of the economically sensitive sectors like industrials, materials.

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