Dividend Growth Investing
Dividend Growth and the Quest for Yield
Dividend growth AND attractive yield?
Many investors are attracted to domestic dividend growth stocks because they are typically quality companies that, as a group, have had stable earnings, solid fundamentals and strong histories of profit and growth—and have a demonstrated history of weathering market turbulence. What investors may not realize is that dividend growers can also offer attractive yields.
The evidence is in the yield on cost basis
Let's look at the yields of the S&P 500® Dividend Aristocrats® Index, which tracks the S&P 500 companies with at least 25 years of consecutive dividend growth. Dividend yields are higher than those of the S&P 500. But the yield on cost basis—measuring the dividend payout in any given year relative to the original investment—frames a more compelling picture.
- The rate of dividend growth for the S&P 500 Dividend Aristocrats Index has been 1.0% greater than that of the S&P 500 since 2005.1
- The S&P 500 Dividend Aristocrats Index generated a yield on cost basis of 4.6% five years ago in 2014. That's 1.4% greater than the yield on cost basis generated by the broad market.
- Moving to the end of 2020, that spread has widened even more to 3.7%.
Clearly, strategies focused on dividend growth have generated attractive income growth over time.
Dividend Yields
Yield on Cost Basis
Source: Bloomberg, as of 12/31/20. "Yield on cost basis" is calculated by ProShares and measures the hypothetical dividend payouts beginning one year after the original investment. Past performance does not guarantee future results. This is a hypothetical illustration. Index performance is for illustrative purposes only and does not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest in an index.
1 The S&P 500 Dividend Aristocrats have had an annualized dividend growth rate of 8.7% vs. 6.3% for the S&P 500,
12/31/05-12/31/20.
The performance quoted represents past performance and does not guarantee future results. Investment return and principal value of an investment will fluctuate so that an investor's shares, when sold or redeemed, may be worth more or less than the original cost. Shares are bought and sold at market price (not NAV) and are not individually redeemed from the fund. Market price returns are based upon the midpoint of the bid/ask spread at 4:00 p.m. ET (when NAV is normally determined for most funds) and do not represent the returns you would receive if you traded shares at other times. Brokerage commissions will reduce returns. Current performance may be lower or higher than the performance quoted. For standardized returns and performance data current to the most recent month end, see Performance.
The takeaway |
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With dividend growth strategies, you get quality companies that have delivered strong returns. You also get the potential for attractive effective yields. |