Deep Dive: These ‘Dividend Aristocrat’ stocks have risen as much as 31% this year, bucking a bad trend

The underperformance of the S&P 500 Dividend Aristocrats Index this year highlights a worrisome trend for venerable consumer brands. Still, there are a number of steady payers that have done well.

The S&P 500 Dividend Aristocrats Index SPDAUDP, +0.12%  is made up of 53 S&P 500 SPX, -0.14%  companies that have increased their regular dividend payouts for at least 25 consecutive years. That’s the only qualification — it makes no difference how high a stock’s current dividend yield is.

Over the past 10 years, the Dividend Aristocrats Index has greatly outperformed the S&P 500 and the Dow Jones Industrial Average DJIA, -0.30% with dividends reinvested:

That’s an impressive track record during a time of (mostly) very low interest rates. Of course, looking back in no way indicates whether the outperformance will continue over the next 10 years.

One easy way to play the Dividend Aristocrats as a group is by investing in the ProShares S&P 500 Dividend Aristocrats ETF NOBL, +0.05% (Disclosure: I hold shares of NOBL.)

First, the losers

So far in 2018, the Dividend Aristocrats Index is down 1.5% (with dividends reinvested), while the S&P 500 is up 2.6% and the Dow is up 1%.

That’s not terrible performance for the Aristocrats, and it may not be a big surprise at a time when interest rates are rising, because when rates rise, the market values of income-producing securities tend to fall over the short term. But 27 of the Aristocrats are down so far this year and a quick look at the worst 10 underscores one of the major stock-market themes for 2018:

Company Ticker Sector Industry Total return – 2018 through May 16 Dividend yield
Clorox Co. CLX, -0.45% Consumer Staples Household/Personal Care -19% 3.24%
Procter & Gamble Co. PG, +0.32% Consumer Staples Household/Personal Care -19% 3.90%
PepsiCo Inc. PEP, +0.28% Consumer Staples Beverages: Non-Alcoholic -18% 3.82%
Colgate-Palmolive Co. CL, -0.04% Consumer Staples Household/Personal Care -17% 2.71%
Stanley Black & Decker Inc. SWK, +1.07% Industrials Tools & Hardware -16% 1.78%
Franklin Resources Inc. BEN, +1.37% Financials Investment Managers -15% 2.73%
AT&T Inc. T, -0.93% Telecommunication Services Major Telecommunications -15% 6.19%
3M Company MMM, +0.73% Industrials Industrial Conglomerates -14% 2.72%
Federal Realty Investment Trust FRT, +0.01% Real Estate Real Estate Investment Trusts -13% 3.51%
Illinois Tool Works Inc. ITW, +1.00% Industrials Industrial Machinery -13% 2.16%
Source: FactSet

The four worst performers are in the consumer-staples sector, which has been the worst of the benchmark index’s sectors this year with a decline of 12.5% (with dividends reinvested). Investors have been showing how worried they are that well-known consumer brands are losing their pricing power.

Here are some comments from the four worst performers’ most recent earnings calls from transcripts provided by FactSet:

• When asked by Deutsche Bank Securities analyst Stephen Powers during the company’s earnings call on May 2 about “a shift in the historic balance of power” from “incumbent big-branded” producers of consumer products “toward new niche players, toward retail inclusive of Amazon AMZN, -0.43%  and private-label brands,” Clorox CLX, -0.45%  CEO Benno Dorer said it was “[c]ertainly not an easy environment.”

• During Procter & Gamble’s PG, +0.32%  earnings call on April 19, CEO David Taylor said: “The market [in the U.S.] is changing and some customers are aggressively pursuing private label with aggressive pricing. The lower private label pricing has been a real challenge, particularly for our Luvs brand.”

• PepsiCo PEP, +0.28%  CEO Indra Nooyi was more subtle in her comments during the company’s earnings call on April 26: “[W]e are watching grocery pricing very, very carefully. And we want to make sure we don’t destroy the pricing architecture across the industry. … But if it’s a question of media spending to make sure that the consumer understands that Pepsi is still a strong, vibrant brand, we’re going to spend on media.”

During Colgate-Palmolive’s CL, -0.04%  earnings call on April 27, CEO Ian Cook said there had been a “slowing of category growth in some markets around the world. And what that has resulted in, in some cases, is heightened promotional activity … to try and get more of that smaller pie. And that puts pressure on pricing.” He added that “we see pricing now flat, which is not common in our industry space.”

Rising interest rates, the maturity of its core business and the uncertainty over whether federal regulators will permit it to complete its acquisition of Time Warner have combined to push shares of AT&T down 15% this year. That has pushed up the dividend yield to 6.19%, and the dividend appears safe based on AT&T’s level of free cash flow, not to mention the company’s obvious commitment to raising payouts every year.

And the winners

Here are the 10 S&P 500 Dividend Aristocrats that have performed the best so far in 2018:

Company Ticker Sector Industry Total return – 2018 through May 16 Dividend yield
W.W. Grainger Inc. GWW, -0.13% Industrials Wholesale Distributors 31% 1.78%
S&P Global Inc. SPGI, -0.33% Financials Financial Publishing/Services 17% 1.01%
Target Corp. TGT, +0.63% Consumer Discretionary Discount Stores 17% 3.30%
Cintas Corp. CTAS, +0.11% Industrials Business Services 17% 0.89%
T. Rowe Price Group TROW, -0.25% Financials Investment Managers 16% 2.32%
Archer-Daniels-Midland Co. ADM, +0.46% Consumer Staples Agricultural Commodities/Milling 13% 3.01%
AbbVie Inc. ABBV, +0.02% Health Care Pharmaceuticals 11% 3.66%
Ecolab Inc. ECL, -0.56% Materials Chemicals: Specialty 10% 1.11%
Automatic Data Processing Inc. ADP, -0.24% Information Technology Data Processing Services 10% 2.16%
Brown-Forman Corp. Class B BF.B, +0.97% Consumer Staples Beverages: Alcoholic 8% 1.08%
Source: FactSet

You can click the tickers for more information about each company, including news, profiles, price ratios and financials.

Don’t miss: 15 dividend stocks whose 4%-plus yields beat Treasury bonds

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