By Philip van Doorn, MarketWatch
Joe Scarnici/Getty Images for AT&T
Some may say it’s foolish to buy shares of dividend stocks when interest rates are rising. But companies that steadily increase dividend payouts have a special allure as long-term investments.
And the proof is that, last year, dividend stocks kept pace with the broader S&P 500 Index /zigman2/quotes/210599714/realtime SPX -0.21% despite the fact that the Federal Reserve had at the end of 2015 raised official rates for the first time in nine years.
In fact, as you can see in the chart below, companies that consistently raise payouts have greatly outperformed the broader market over long periods. That suggests they are worth owning, no matter the interest-rate or economic environment.
As interest rates rise, the market values of bonds automatically fall, so their yields match those of newly issued bonds of similar quality. Something similar happens to stocks with relatively high dividend yields. However, dividend-paying companies can offset this drag by boosting sales or earnings, propelling share prices.
Of course, what’s most important is that a company known for a generous dividend payout doesn’t cut its dividend. That typically guts the stock price, as investors also lose income and move on to other stocks.
So we have put together two lists of solid dividend payers to consider. But first, some definitions.
You might be familiar with the S&P 500 Dividend Aristocrats Index /zigman2/quotes/210598428/delayed XX:SP50DIV -0.08% , which is maintained by S&P Dow Jones Indices and is made up of the 50 companies in the S&P 500 /zigman2/quotes/210599714/realtime SPX -0.21% that have raised their dividends on common shares for at least 25 straight years. That’s a track record any company would be proud of, and it certainly makes management teams think twice before considering a dividend cut. Since this is the only criterion, the dividend yields aren’t necessarily very high. The idea is that consistently raising the payout might be correlated with good long-term performance.
An easy way to invest in the entire index is the ProShares S&P 500 Dividend Aristocrats ETF /zigman2/quotes/208747379/composite NOBL +0.01% .
The S&P 500 Dividend Aristocrats Index negligibly underperformed the entire S&P 500 last year, and you can see that over the past 10 and 15 years, it has widely outperformed:
|Index||Total return - 2016||Total return - 3 years||Total return - 5 years||Total return - 10 years||Total return - 15 years|
|S&P 500 Dividend Aristocrats||11.8%||34.4%||97.3%||152.2%||307.1%|
High-Yield Dividend Aristocrats
To broaden our horizons, we’re focusing today on the S&P High Yield Dividend Aristocrats Index /zigman2/quotes/210599901/delayed XX:SPHYDA +0.21% , which is also maintained by S&P Dow Jones Indices and includes the 106 components of the S&P 1500 Composite Index that have raised their dividends on common shares for at least 20 consecutive years. Since the S&P 1500 Composite Index includes the S&P 500, (along with the S&P 400 Mid-Cap Index /zigman2/quotes/219506813/composite MID -0.02% and the S&P Small-Cap 600 /zigman2/quotes/210599868/delayed SML +1.07% ), any Dividend Aristocrat is also a high-yield dividend aristocrat.