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High-Quality Dividend Stocks Are on Sale. Now Is the Time to Buy.

Not all of the Aristocrats have done poorly this year—for instance, Caterpillar, up 18%.

David Paul Morris/Bloomberg

Referenced Symbols

stocks with steadily growing dividends—market favorites in recent years—haven’t been getting much respect lately. It may be time to give them another look.

The equal-weighted ProShares S&P 500 Dividend Aristocrats exchange-traded fund (ticker: NOBL), a good proxy for these shares, has returned about 5% this year, including dividends. That’s far below the 18% result for the broader market.

Several other ETFs that emphasize growing dividends—often a hallmark of dependable companies—have had similar results.

“We have seen this big rotation into tech and growth stocks,’’ says Keith Lerner, co-chief investment officer for Truist Advisory Services. Those shares often come with no or minimal dividends.

Rising bond yields have also hurt, offering income hunters a clear alternative. After a decade of depressed levels, bond yields have risen nicely. The Federal Open Market Committee has aggressively raised short-term interest rates since March of 2022, pushing up yields as it battles inflation.

The 10-Year U.S. Treasury was recently yielding about 4.3%, compared with around 2% in early 2022. The S&P 500 index’s yield, by contrast, was recently at 1.5%.

Bottom line: There’s a lot more competition for dividend stocks.

The 66 S&P 500 Dividend Aristocrats include household blue-chip names such as Johnson & Johnson (JNJ), Procter & Gamble (PG), and Caterpillar (CAT). These and the other companies in the index have paid out a higher dividend for at least 25 straight years, testament to their solid business models.

But the index’s sector composition has weighed on performance in 2023. Information technology accounts for only 3% of the index. The Technology Select Sector ETF (XLK), meanwhile, has returned about 40% this year.

And one of the Aristocrat’s largest weightings is consumer staples, at about 24%. Those stocks are down about 3% on average.

Lerner also points to weakness in “parts of healthcare and utilities—the so-called bond proxies.” The healthcare sector has returned about minus 2%, and utilities are off by about 11% year to date.

Coming Up Short

The S&P 500 Dividend Aristocrats, known for their consistent dividend increases, have trailed the market this year.

ETF / Ticker3-Month ReturnYTD Return2022 Return3-Yr Return5-Yr Return
ProShares S&P 500 Dividend Aristocrats / NOBL3.8%4.6%-6.5%10.5%9.2%
SPDR S&P 500 ETF Trust / SPY5.618.4-

Note: Returns through Sept. 5; three- and five-year returns are annualized.

Source: Morningstar

Not all of the Aristocrats have done poorly this year. Caterpillar is up 18%, for instance, and Sherwin-Williams (SHW) has gained 13%.

The S&P 500, unlike the Aristocrats, has benefited handsomely from the Magnificent Seven: Tesla (TSLA), Nvidia (NVDA), Apple (AAPL), Amazon.com (AMZN), Microsoft (MSFT), Meta Platforms (META), and Alphabet (GOOGL). As of Aug. 31, those stocks had accounted for 71.5% of the S&P 500’s year to date return, according to S&P Dow Jones Indices.

None of those stocks are in the S&P 500 Dividend Aristocrats, however, and many don’t even pay a dividend.

“The bulk of performance has really been driven by a very small handful of stocks,” says Erin Browne, a portfolio manager at Pimco.

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Now could be a good time to start picking up some quality dividend stocks. Caterpillar, for instance, can be had for 14 times the current year’s earnings, down from 17 last year. Artistocrats and the like “do offer good value for longer-term horizon portfolios,” says Browne.

“Those stocks will do well—and really show their stripes and outperform—in an environment where we start to price in a slowdown and certainly price in the Fed starting to cut rates.”

That isn’t the case now, but it’s worth considering an allocation to the shares “as signs still point to some slowing in the economy as we move into 2024,” Lerner says. Aristocrats, he adds, “would likely do better if we start seeing greater cracks in the economy.”

These stocks are clearly defensive. With all that has happened this year, including the regional-banking crisis, it’s easy to forget last year’s performance by the Aristocrats. The group had a return of minus 6.5%, well ahead of the S&P 500’s minus 18%. The Aristocrats also provided some shelter from the bond market’s double-digit losses in many asset classes.

Simeon Hyman, global investment strategist at ProShares, says the Aristocrats’ quality is evident in several ways. One is their long track records of dividend increases, a sign of financial stability and strong free-cash-flow generation.

Hyman points out that in the second quarter, S&P 500 earnings fell by nearly 6% year over year, but the Aristocrats’ earnings increased by about 10% on average, based on Bloomberg data.

“The ability [of the Aristocrats] to grow those earnings in an earnings recession and the ability to crank that out without using a lot of capital is the tangible benefit of quality” stocks right now, he says.

There are other options for investors looking for exposure to these stocks, however.

One is the Vanguard Dividend Appreciation ETF (VIG), which aims to track the S&P U.S. Dividend Growers Index.

The ETF’s composition is much different than the one for the S&P 500 Dividend Aristocrats. It recently had 314 holdings, much bigger than the Aristocrats, and one of its largest sector weightings recently was technology, at 19%. Its holdings include Apple and Microsoft.

The $69 billion fund, which has an expense ratio of 0.06%, has returned 7.9% this year.

There’s also the $24 billion iShares Core Dividend Growth ETF (DGRO). It has returned 4% this year; its expense ratio is 0.08%. The fund’s nearly 430 holdings include Exxon-Mobil (XOM), AbbVie (ABBV), and Home Depot (HD).

These are dependable names, even if they aren’t very appealing to the broader market right now, and their dividends should continue to be reliable and grow.

Write to Lawrence C Strauss at lawrence.strauss@wsj.com