In a market environment with low yields and potential interest rate cuts, as seen in the U.S. in 2019, yield-seeking investors may become more interested in equity dividend yield strategies. Dividend strategies could satisfy investors’ needs in several ways, including higher dividend income, favorable risk-adjusted returns, lower volatility, and more downside protection in bearish market environments. In this paper, we look at the S&P High Yield Dividend Aristocrats and its characteristics, risk/return profile, and performance attribution.
Two common strategies for dividend investing are high dividend yield and dividend growth. To capture the premium of a dividend growth strategy, S&P Dow Jones Indices launched the S&P High Yield Dividend Aristocrats in November 2005. The index is designed to track a basket of stocks from the S&P Composite 1500® that consistently increased their total dividends per share every year for at least 20 consecutive years. The index universe covers large-, mid-, and small-cap stocks in the U.S. equities market.
The outperformance of the S&P High Yield Dividend Aristocrats has historically been attributed to stock selection rather than sector allocation. Moreover, the index constituents tend to have the high-quality characteristics of higher operating profitability and more conservative investment growth than the overall market. From business operations and financial perspectives, high-quality fundamentals form the foundation for sustainable dividend increases.