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Dividend Aristocrats Funds Whose Yield Tops The S&P 500 — But Beware Of Pitfalls

Looking for relatively safe yield? Especially yield that tops the S&P 500 average? The Dividend Aristocrats may be your answer.




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Those are S&P 500 companies that have raised their dividends for 25 years in a row or more.

And you can invest in the Dividend Aristocrats through a mutual fund and an ETF. Since there are now 65 Dividend Aristocrats, investing via a fund offers you built-in diversification.

That also saves you effort, time and money.

Dividend Aristocrats: Taking The Strategy To The Next Level

The main funds are $8.6 billion ProShares S&P 500 Dividend Aristocrats ETF (NOBL) and $68.8 million CBOE Vest S&P 500 Dividend Aristocrats Target Income Fund (KNGIX).

You can also take this strategy further. If your main goal is obtaining income that’s relatively safe because it’s from a diversified pool of investments that are not excessively high-risk, why not invest in funds that hold stocks in other widely recognized indexes that raise their dividends year after year?

The $3.1 billion SPDR S&P U.S. Dividend Aristocrats ETF (UDVD) focuses on S&P Composite 1500 Index stocks that have raised dividends every year for at least 20 consecutive years.

The $123.6 million SPDR S&P Emerging Markets Dividend Aristocrats ETF (EDVD) holds stocks in the S&P Emerging Plus LargeMidCap Index that have increased or maintained dividends for at least five consecutive years.

Dividend Aristocrats: The Name Game

In addition, you can find funds that use similar investment approaches but do not include Dividend Aristocrats in their name. The $21.6 million ProShares MSCI Emerging Markets Dividend Growers (EMDV) seeks what fund literature calls “the best dividend growers,” but the fund does not set a minimum standard for the number of years in a row a company must raise those dividends.

Currently, those last three funds sport 12-month yields of 2.20%, 2.60% and 2.48% respectively vs. 1.30% for the S&P 500 in the form of a popular ETF that tracks the bogey, $377.8 billion SPDR S&P 500 ETF (SPY).

Other funds using variations of this Dividend Aristocrats strategy pay even higher yield.

Pitfalls And Solutions

What’s the catch? One catch is that all but two of the funds with “Dividend Aristocrats in their name — KNGIX and NOBL — trade on foreign exchanges.

Yet you can still invest in many of them. You need an account at a brokerage that will buy foreign stocks and ETFs for you. And you need to fill in some paperwork saying that you want to use the account for foreign investments.

A firm like IBD Best Online Stock Broker, Fidelity Investments, offers such accounts.

Foreign Mutual Funds Are A No-No

Still, as a U.S. investor, you cannot invest in foreign mutual funds, says Todd Rosenbluth, head of ETF & mutual fund research for CFRA Research.

That puts Israel-based $73.4 million MTF TF S&P 500 Dividend Aristocrats, which may pop up in fund searches using the “Dividend Aristocrats” phrase, out of reach.

Aristocrat Dividends Funds: Size Matters

A second potential catch involves size. Several ETFs that use the Dividends Aristocrats strategy, whether they are foreign or U.S., have less than $100 million in assets.

That’s not necessarily a deal breaker. But in general you should be wary of ETFs with assets below that threshold. It typically takes that much in assets for a fund to reach profitability. And an unprofitable fund is more likely to be shut down.

Retirement Income Strategy

Investing in funds that target stocks that increase their dividends can be an especially attractive strategy for retirees. Many have reached a life stage where income is more important to them than aiming for the fastest possible growth of their fund’s value.

After all, yield on the 10-year Treasury note was down to 1.23% going into Wednesday. Its 2021 peak was 1.74% in March. The S&P 500’s yield is just slightly higher, around 1.30%.

In contrast, Dividend Aristocrats funds tracked by Morningstar Direct yield 1.43% to 1.94%. Some variations yield up to 2.96%.

Tradeoff For The Dividend Aristocrats Strategy

You pay a price for the Dividend Aristocrats strategy.

Only stocks with steady and solid fundamentals tend to be able to pay ever-higher dividends even when the surrounding market and economy are turbulent.

But plowing cash flow into dividends rather than investing in future growth means that earnings tend to grow more slowly than they might otherwise.

For instance, NOBL has averaged a 12.65% annual total return in the past five years going into Wednesday. The S&P 500 index itself has done better, averaging 16.96%.

Portfolios Differ

If the Dividend Aristocrats strategy and its variations appeal to you, do your homework. Funds use different investment approaches. Funds don’t always invest in what you likely expect them to. Some funds invest more in some stocks than others.

And some funds invest in securities other than Dividend Aristocrats themselves. NOBL, for example, invests just in Dividend Aristocrats. KNGIX invests in those stocks as well as call options in them. Those call options are a second source of income for the fund.

Before taking the plunge with foreign funds, find out what extra fees and taxes you may become liable for.

Dividend Aristocrats Funds

Ranked by year-to-date returns as of 7/19/21*

Fund Symbol Region of sale 12-mo yield YTD 3-yr avg
MTF TR S&P 500 Dividend Aristocrats N.A. Israel N.A. 17.48% 10.29%
SPDR S&P US Dividend Aristocrats ETFDis (UDVD) Eur. 2.20% 14.43 10.74
ProShares S&P 500 Dividend Aristocrats (NOBL) Global 1.94 13.43 14.41
CBOE Vest Dividend AristocratsTgtIncIns (KNGIX) U.S. 1.43 12.85 13.30
SPDR S&P UK Dividend Aristocrats (UKDV) Eur. 2.73 9.98 0.89
SPDR S&P Euro Dividend Aristocrats (SPYW) Eur. 2.96 9.90 1.80
SPDR S&P EmMks Dividend Aristocrats (EDVD) Eur. 2.60 1.28 3.05
Kernel S&P Global Dividend Aristocrats N.A. New Zeal. N.A. N.A. N.A.
KIM US Dividend Aristocrats Fdr Eq A USD N.A. So. Korea N.A. N.A. N.A.
SPDR S&P 500 (SPY) Global 1.30 14.22 16.95
 Source: Morningstar Direct, * – Israeli fund return as of 7/15/21

Follow Paul Katzeff on Twitter at @IBD_PKatzeff for tips about retirement planning and actively run portfolios that consistently outperform and rank among the best mutual funds.

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