The Dividend Diet: A Guide To Investing On Easy Street (BATS:NOBL) (2024)

Investment Thesis

Dividend investing is one of the great classic examples of passive income. A force to be reckoned with, dividends have accounted for 44% of the S&P 500 returns over the last 80 years.

In fact, some investors adhere to a strict regimen of holding dividend stocks exclusively. I call this "The Dividend Diet", and below I explain, in detail, one of the easiest ways for investors to access some of the most consistent dividend payers in the market today.

For investors seeking a single-ticker solution to a dividend dream-team, consider adding ProShares ETF (BATS:NOBL) to your portfolio in order to gain exposure to the coveted group of 53 dividend aristocrats.

Cash Flow, Cash Flow & Cash Flow

It's hard not to like receiving a paycheck for essentially doing nothing. It's even better when you can take that paycheck and reinvest it to continue the snowball rolling downhill. This is why dividend investing is one of the most popular passive income strategies for people of all ages.

For example, the internet is littered with articles such as this one, which identifies dividend stocks for college grads to become rich via compound interest. Heck, it sure worked for Ms. Grace Groner - her estate, which stemmed from a $180 Abbot Laboratories (ABT) stock purchase she made in 1935, was worth $7 million in 2010 when she finally passed.

Source

While stories like Ms. Groner's are indeed realistic and continue to happen, it's obviously much more of a gamble to choose just one individual dividend stock in hopes that its business is not disrupted over the next several decades. Even if the company continues to operate, dividends are never guaranteed to be paid. Although there are some stocks out there (like this one) that in fact are extremely hard to imagine ever being disrupted, but overall, they're few and far between. With NOBL, these particular issues cease to exist as you'll always be invested in the most current Dividend Aristocrats.

Dividend Aristocrats ETF

The ProShares S&P 500 Dividend Aristocrats ETF, "NOBL", provides you with exposure to the 53 current dividend aristocrat stocks.

Getting on the highly-regarded Aristocrats list is a huge accomplishment for companies as it projects a proven business model of strong, stable, and consistent operations able to sustain decades of dividend growth.

An S&P 500 company becomes a Dividend Aristocrat only once it has paid and increased its dividend for 25 or more consecutive years.

One of the more unique features of investing in an ETF that tracks the Aristocrats' index is the fact that it provides much more sector diversification than a traditional dividend yield-based fund.

This is because the companies that comprise the Dividend Aristocrats span all 11 sectors that make up the S&P 500 index and therefore encompass both large cap growth and large cap value companies. This differs from the traditional income focused funds which tend to be more value-oriented in their holdings with more weighting toward financial, telecom, and utility stocks.

The increased popularity of dividend growth investing recently has elevated the relevance of the S&P 500 Dividend Aristocrat index in the eyes of investors- for instance, NOBL created in 2013, is just 5 years old.

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Dividend growth investors focus on owning companies that are churning out robust free cash flow (a company's operating cash flow less capital expenditures). This is important, as strong free cash flow is what allows a company's management the room to pay a higher-than-market dividend growth rate.

Dividend Aristocrats' index Performance

The Dividend Aristocrats' index has produced impressive risk-adjusted returns over the last 25 years. In fact, annualized risk-adjusted returns are far in excess of the S&P 500's over just the last decade alone:

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See, many times in the investment world you'll hear more about a particular investments' years of upside (and how much upside) rather than the downside. So, inherently, people tend to focus only on investments that seem to grow like wildfire, accepting the massive downside by rationalizing that the growth has been (or will be) phenomenal.

It's embarrassingly easy to miscalculate and assume that if you take a 60% loss for example, all you need is a 60% gain to wipe out that loss right? Well, you'll in fact need a 150% gain (seen below) in order to get back to where you started:

I've met several brokers at the golf course near my house (I'm terrible by the way but it's fun to network), the good ones won't normally speak about returns that shoot to the moon, but rather, they'll mention the importance of managing downside risk.

Below you can see that the Dividend Aristocrats, when compared to the S&P 500, do just that:

Source

Dividend Aristocrats have historically seen smaller drawdowns during recessions relative to the S&P 500, which makes holding NOBL through recessions that much easier.

The Aristocrats accomplish this in part by having great business models with strong competitive advantages that generate stronger cash flows during recessions. This allows them to gain market share while weaker businesses simply fight just to tread water.

Generally speaking, a company that issues dividends is likely to be generating earnings or cash flows so that it can in fact issue dividends to shareholders to begin with. So inherently this excludes 'pre-earnings' start-ups and tight margin businesses. In short, it excludes the riskiest stocks i.e. most volatile.

In addition, a company that pays consistent dividends must be more selective with the growth projects it takes on because a portion of its cash flows are being paid out as dividends. So, scrutinizing over capital allocation options potentially could add to shareholder value.

2018 Dividend Aristocrats

Below is the current list of all 53 dividend aristocrats:

Archer-Daniels-Midland (ADM)

Brown-Forman (BF.B)

Colgate-Palmolive (CL)

Clorox (CLX)

Coca-Cola (KO)

Hormel Foods (HRL)

Kimberly-Clark (KMB)

McCormick & Company (MKC)

PepsiCo (PEP)

Procter & Gamble (PG)

Sysco Corporation (SYY)

Wal-Mart (WMT)

Walgreens Boots Alliance (WBA)

A.O. Smith (AOS)

Cintas (CTAS)

Dover (DOV)

Emerson Electric (EMR)

Illinois Tool Works (ITW)

3M (MMM)

Pentair (PNR)

Roper Technologies (ROP)

Stanley Black & Decker (SWK)

W.W. Grainger (GWW)

General Dynamics (GD)

Abbott Laboratories (ABT)

AbbVie (ABBV)

Becton, Dickinson & Company (BDX)

Cardinal Health (CAH)

Johnson & Johnson (JNJ)

Medtronic (MDT)

Genuine Parts Company (GPC)

Leggett & Platt (LEG)

Lowe's (LOW)

McDonald's (MCD)

Target (TGT)

V.F. Corporation (VFC)

Aflac (AFL)

Cincinnati Financial (CINF)

Franklin Resources (BEN)

S&P Global (SPGI)

T. Rowe Price Group (TROW)

Air Products and Chemicals (APD)

Ecolab (ECL)

PPG Industries (PPG)

Praxair (PX)

Sherwin-Williams (SHW)

Nucor (NUE)

Chevron (CVX)

Exxon Mobil (XOM)

Automatic Data Processing (ADP)

Federal Realty Investment Trust (FRT)

AT&T (T)

Consolidated Edison (ED)

Ownership Of ProShares Dividend Aristocrats ETF

Now that I've covered the details of dividend growth investing, defined and listed the Aristocrats, noted returns and compared volatility, I'd now like to get into the "pros and cons" of the NOBL ETF.

Pros:

The NOBL ETF is a single-ticker solution to gaining exposure to all 53 Dividend Aristocrats. Instead of buying one, several, or even 10 of the stocks listed above, you'll own a piece of them all.

This means you're able to deploy a relatively small amount of capital to accomplish the same goal, compared to the capital required to efficiently purchase the equities individually.

Further, you don't have to constantly manage the holdings to ensure the companies maintain their coveted "Aristocrat" status. NOBL automatically does this for holders of the ETF as "Dividend Aristocrats" is the entire theme of the fund itself. See, each year a few stocks might fall off the list, while others join it. If you own NOBL, this buying and selling is effortlessly done for you within the ETF.

In addition, just like other funds and ETFs alike, you receive the added bonus of diversification. Grace Groner's story mentioned above, while not incredibly rare, still, the risk of owning one stock rather than a basket of stocks long-term is simply not worth the risk to reward (generally speaking).

Take KODAK for example, founded in 1888, the camera & film company was one of the top household names of the 20th century. The stock was a popular "no-brainer" to set on the shelf and own long-term, or buy and gift to children.

KODAK paid a quarterly dividend for several decades, but by the 1990's the company began to struggle as the print photo industry crumbled. A few years later in 2003, the company cut its dividend by 43% to 25 cents quarterly, decreasing the dividend yield to 1.9%. KODAK reported that the drastic cut in dividends was due to a new company strategy that included increased investment in newer technology. The news brought KODAK's stock down 18% in a single day. Finally, in April 2009, the company announced that it would no longer pay dividends on its stock as a result of declining sales. In January 2012, the company, which had been struggling for years, declared bankruptcy.

So while most, if not all 53 current Dividend Aristocrats seem indestructible today, no one knows where each of them will be 20 years from now. Allow NOBL to pluck and add Aristocrats as the years go by.

Cons:

For the features I list above, there is a cost- it's called an expense ratio, and the ProShares Dividend Aristocrat ETF has an expense ratio of 35 bips (0.35%). Long-term this is an obvious drag on total return, although for what you essentially get, the cost (in my opinion) is well worth it.

Dividend Yield

Let's talk about dividends and perception vs. reality:

NOBL data by YCharts

The current dividend yield for NOBL is 1.87%. For newer investors, this number may seem, well, puny when compared to some BDC or higher-yielding equity.

Glancing at the current yield percentage of a stock and basing a decision from there can potentially get you into some hot water. See, it's a problem with strategies aimed at high dividends- you'll notice that the Aristocrats aren't defined based on yield.

Rather, the only requirement is that they've consistently raised dividends. If the stock price has been appreciating as well, (which they have...massively) then the yield won't necessarily (as a percentage) be all that high at all. In short, don't let the yield percentage deceive you when hunting for solid stocks. Holders of NOBL have experienced a total average annual r-o-r of 13.92% which is strong growth (just look at the chart above), so of course the dividend yield when displayed as a percentage is going to look low- but don't be fooled!

Conclusion

With any investment style, achieving higher total returns with lower volatility is the 'Holy Grail' of investing.

Instead of exposing yourself to concentration risk of single equities, choosing this ETF gives provides full exposure to the S&P 500 Dividend Aristocrats list and manages the entire portfolio for a cost of 0.35%.

If you're interested in exploring life as a dividend growth investor, you might want to try "The Dividend Diet" and invest using the "Easy Street" method of the one-ticker solution known as ProShares Dividend Aristocrats ETF: NOBL.

For more information on long-term investing, feel free to visit my profile to view my other articles. Additionally, I invite you to leave commentary and feedback for myself and others via the comment section below. Thank you.

Kenny Robinson