Downside Protection: Another Perk Of Dividend Growth Strategies

Investors often expect dividend stocks and exchange traded funds to offer some downside protection when equities falter, but as 2018 proved, it pays to be selective with dividend ETFs when looking for downside buffers.

Dividend growth ETFs such as the ProShares S&P 500 Dividend Aristocrats ETF (CBOE: NOBL), can help investors limit volatility when broader markets decline.

What Happened

NOBL targets the S&P 500 Dividend Aristocrats Index, a benchmark that requires its components to have minimum dividend increase streaks of 25 years. The strategy proved less troublesome than diversified equity benchmarks last year.

“The S&P 500 Dividend Aristocrats, which is designed to measure the performance of S&P 500 companies that have increased their dividends for the last 25 consecutive years, fared relatively better in 2018 but still ended in the red [by 2.73 percent],” according to a recent S&P Dow Jones Indices note.

Including paid dividends, NOBL lost 3.3 percent last year, while the S&P 500 was off 4.6 percent.

Why It’s Important

NOBL just had its fifth birthday, but its underlying index is much older. The benchmark’s track record confirms it often performs less poorly than the S&P 500 when the market declines.

“Since year-end 1989, there have been six calendar years of negative performance for the S&P 500 — and in all six years, the S&P 500 Dividend Aristocrats outperformed the equity benchmark by an average of 13.28 percent,” according to S&P Dow Jones Indices. “In fact, the S&P 500 Dividend Aristocrats produced a positive total return in three of those years.”

Dividend growth strategies can also be less volatile than the broad market when the latter declines. In a down 2018, the S&P 500’s annualized volatility was 17 percent, or 200 basis points above NOBL’s.

What’s Next

Historical data indicate that if more dramatic declines are seen for U.S. stocks, NOBL is likely to endure less punishment.

“We have demonstrated that the S&P 500 Dividend Aristocrats outperformed the S&P 500 in down markets by an average of 1.13 percent per month,” according to S&P Dow Jones. “The results were more evident when the S&P 500 lost the most, with the S&P 500 Dividend Aristocrats outperforming by an average of 2.46 percent when the S&P 500 lost at least 5 percent.”

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