The Recession-Fighting Power of Growing Dividends

One of the most common questions I hear from readers usually revolves around dividends. This makes sense. Reliable dividend payers are usually mature companies with steady revenue streams.

These companies tend to be recession resistant. Their stocks are less volatile and offer some protection in case of a downturn. Plus, dividends can meaningfully boost your income.

When picking an income stock, a high yield alone is not enough. You have to look over the company’s public filings to examine its financial trends. It can involve many hours of hard work. And with so many stocks out there, choosing the best from a large stock universe can be overwhelming.

Narrow Down the Field

The good news is that there are available resources that can help you narrow down the field.

One good starting point is the S&P Dividend Aristocrats index. This index holds a group of S&P 500 companies that meet a single, but not easy, requirement.

To be a Dividend Aristocrat, a company must have increased its dividend payouts for at least 25 years in a row. This means that every Dividend Aristocrat is an established company with a long history. There are no flashes in the pan here.

As of the end of October, there are 57 stocks in the index, so a little more than 10% of the S&P 500 made the cut.

The median market capitalization of these companies is about $47 billion. Even the smallest company has a market cap north of $6 billion.

Perseverance and Consistency

It’s no easy feat to increase dividend every year for 25 years. Consider that almost 20 companies dropped out of the index in 2009 and 2010 because they had to cut their dividends as a result of the Financial Crisis. To their credit, every company in the Dividend Aristocrats index today managed to keep their dividend growth streak alive even during the economy’s darkest days.

The weighted-average yield of the Dividend Aristocrats index is about 2.7%, which compares favorably to the S&P 500’s 1.9%. The yields range from about 5.2% to as low as 0.5%. The dividend, when invested, over time can help boost returns.

The graph above compares the 10-year total returns (with dividend reinvested) of the Dividend Aristocrats index and the S&P 500. Due to scale, the difference in performance may not look that huge on the graph, but in fact, over the past 10 years the Dividend Aristocrats have outperformed the S&P 500 by more than 40 percentage points (302% vs. 261%)!

The table below compares the annualized returns for the two indexes over different periods.

With the exception of the three-year period, the Dividend Aristocrats were the winners. This is especially impressive considering the fact that Dividend Aristocrats index did not benefit from FAANG, the mega-cap tech stocks that have rallied strongly in recent years and helped drive the rise in the S&P 500. The strong one-year outperformance likely reflects the market’s recent preference for more safety given slower economic growth and trade worries.

The Virtuous Cycle of Growing Dividends

Our little exercise highlights the importance of sustainable and growing dividends. After all, on the surface a 2.7% yield won’t really wow anyone. But the consistent dividend growth leads to consistent income growth. And if you reinvested that growing income, the gains can really add up over time.

Those interested in investing in the S&P 500 Dividend Aristocrats can consider the ProShares S&P 500 Dividend Aristocrats (NOBL), an ETF that seeks to track the index.

Those more interested in individual stocks can browse through the index. After all, the 57 Dividend Aristocrats list is a good starting point.

For income investors, another source of robust and resilient dividends is the utilities sector, a classic safe haven during uncertain times. Utilities provide essential services and as such, they tend to weather recessions.

For our “dividend map” of safe, high-yielding utility stocks, click here.