Indexology^® Blog

The S&P High Yield Dividend Aristocrats^® includes large-, mid-, and small-cap companies in the U.S. that have raised their dividends for at least 20 consecutive years. The index recently concluded its annual reconstitution on Jan. 31, 2024, which brought 18 new members into this accomplished group. Accounting for the three deletions, the index’s total count increased from 121 to 136, which enhances its overall diversification and liquidity. This blog will examine the additions and deletions through a size and sector lens and provide a look at the laudable track record of constituents’ dividend increases.

Exhibit 2 details how the reconstitution affected the S&P High Yield Dividend Aristocrats from a size perspective. Pre-reconstitution, the index had 77, 31 and 13 constituents in the S&P 500^®, S&P MidCap 400^® and S&P SmallCap 600^®, respectively. The 15 net additions included 12 net additions from the S&P 500, 4 additions from the S&P MidCap 400, and 1 net deduction from the S&P SmallCap 600. Post-reconstitution, there are 89, 35 and 12 constituents from the S&P 500, S&P MidCap400 and S&P SmallCap 600, respectively.

As Exhibit 3 displays, Utilities and Industrials were the biggest beneficiaries of the reconstitution, with their net counts increasing by 7 and 4, respectively. Industrials now comprises 30 constituents, 8 more than the next-highest sectors by count: Financials and Utilities, each with 22. After losing two constituents, Consumer Staples dropped to the third-highest sector by count, with 19. The lone constituent in the Communication Services sector, John Wiley & Sons, was removed from the index, resulting in Communication Services being the only GICS^® sector without representation in the index.

A Long History of Dividend Growth

Exhibit 4 summarizes the number of constituents that have increased their dividends in five-year increments. Notably, over one-half of constituents have increased their dividends for 35 years or longer, and over 36% have achieved this feat for 45 years or longer. These track records are certainly commendable and demonstrate these companies’ historically consistent ability and willingness to return increasing amounts of shareholder capital across multiple decades.

The S&P 500^® Dividend Aristocrats^® seeks to track an elite group of companies that have raised their dividends for a minimum of 25 consecutive years. This index has just concluded its annual reconstitution, which was effective at the market close on Jan. 31, 2024. Fastenal has been added, while Walgreens is out, which keeps the membership list at 67 stocks.

Introducing the Index’s Newest Member: Fastenal Company

Fastenal is the latest company to be added to this prestigious index by raising its dividends for 25 consecutive years. This new S&P 500 Dividend Aristocrat is an industrial distributor that sells items ranging from fasteners to tools and has evolved into a supply chain solution company.

As of Dec. 31, 2023, Fastenal has a gross margin of 45.7%,¹ a return-on-equity of 34.5% and a low debt-to-equity ratio of 7.8%. Fastenal has a dividend yield of 2.3%, which is in line with the 2.4% overall yield of the S&P 500 Dividend Aristocrats.

A Long-Term Member Is out: Walgreens Boots Alliance, Inc.

Walgreens Boots Alliance was dropped from the index after the pharmacy chain reduced its quarterly dividends by 48% to 25 cents per share. The move comes as the company seeks to strengthen its long-term balance sheet and cash position.

Walgreens had been a long-time member of the S&P 500 Dividend Aristocrats, having increased its annual dividends for almost 50 years. However, this index’s stringent methodology requires the 25 years to be consecutive, and rules are rules.

The S&P 500 Dividend Aristocrats Sector Breakdown

These changes did not have a material impact on the overall sector weights. As Exhibit 1 shows, the index retains its relatively large overweights in consistent dividend-paying sectors such as Consumer Staples and Industrials, with large underweights in IT, Communication Services and Consumer Discretionary.

A Long History of Dividend Growth

While one of the longer-standing members of the index was removed, Exhibit 2 shows that more than half of the current constituents in the S&P 500 Dividend Aristocrats have grown their dividends for more than 40 years.

¹ Taylor Ranta Oborski, Fastenal Company Reports 2023 Annual and Fourth Quarter Earnings, Jan. 18, 2024 .

While most dividend strategies underperformed their respective benchmarks in 2023, the S&P Pan Asia Dividend Aristocrats^® impressively outperformed the S&P Pan Asia BMI by approximately 3.50% (see Exhibit 1). Furthermore, despite the outperformance, the S&P Pan Asia Dividend Aristocrats’ valuations and dividend yield remained favorable relative to the benchmark (see Exhibits 3 and 4). This blog will examine these metrics in more detail, in addition to providing a detailed performance attribution for 2023.

As Exhibit 1 shows, the S&P Pan Asia Dividend Aristocrats’ strong 2023 performance further boosted its long-term outperformance versus the S&P Pan Asia BMI. Going back to Dec. 31, 2001, the S&P Pan Asia Dividend Aristocrats has outperformed the S&P Pan Asia BMI on average by 2.35% annually. Additionally, this long-term outperformance has been achieved while also delivering a lower full-period volatility, maximum drawdown and downside capture ratio.

Exhibit 2 displays the 2023 performance attribution for the S&P Pan Asia Dividend Aristocrats and S&P Pan Asia BMI. As shown in the attribution analysis columns, the total outperformance totaled 3.50%, with 7.15% due to the bottom-up stock selection effect and -3.65% from the allocation or sector effect. Information Technology was the largest positive-contributing sector for the S&P Pan Asia Dividend Aristocrats, at 10.20%, with 10.78% from the selection effect and -0.58% due to the allocation effect.

The key differentiator of the S&P Pan Asia Dividend Aristocrats versus its benchmark is the requirement that stocks must increase dividends per share for at least seven consecutive years. This filter, in addition to the payout and dividend yield filter, may bias the index toward selecting higher quality stocks since the ability to consistently grow dividends over the long term can be an indication of financial strength and discipline.

Exhibit 3 displays the valuation comparison and discount of the S&P Pan Asia Dividend Aristocrats versus its benchmark. The index is cheaper on all three metrics shown, with an average discount over the three metrics at approximately 34%. Not shown in the table but important nonetheless, is the return-on-equity (ROE) metric, which measures how efficiently a company utilizes shareholder capital to generate net income. The S&P Pan Asia Dividend Aristocrats has a 9.9% ROE versus 9.1% for the S&P Pan Asia BMI as of Dec. 29, 2023.

As Exhibit 4 shows, the index’s dividend yield has been higher than the Pan Asia BMI’s dividend yield every year since 2009. Furthermore, the average dividend yield for the S&P Pan Asia Dividend Aristocrats was 3.42% versus 2.47% for the S&P Pan Asia BMI over this period. Interestingly, the year-end 2023 dividend yield for the S&P Pan Asia Dividend Aristocrats was 3.71%, 8.40% higher than its historical average versus the S&P Pan Asia BMI’s year-end 2023 dividend yield of 2.57%, only 4% higher than its historical average.

Conclusion

Following a strong year of performance in 2023 thanks to its effective bottom-up stock selection, the S&P Pan Asia Dividend Aristocrats heads into 2024 holding a dividend yield and valuation advantage over its benchmark. For investors seeking an index with these value and dividend yield exposures, in addition to various quality and dividend filters, the S&P Pan Asia Dividend Aristocrats Index is an option to consider.

Global equities witnessed a strong Q4 2023 as slowing inflation and the potential for lower interest rates improved market sentiment drastically. The S&P Global BMI rallied 11.4% for the quarter, finishing the year with an impressive 21.9% return. Middle East and North Africa (MENA) equities rose 6.4% in Q4, as measured by the S&P Pan Arab Composite, adding to a 10.1% total return for the year. Gulf Cooperation Council (GCC) countries largely posted gains, led by Bahrain (23.4%) and Saudi Arabia (15.0%), while Kuwait was an exception, with a 6.3% loss.

Shariah-compliant benchmarks, including the S&P Global BMI Shariah and Dow Jones Islamic Market (DJIM) World Index, beat their conventional counterparts by about 0.5% during the quarter, extending their outperformance to over 5% for the year and 19.7% cumulative over the past five years. Largely driven by its outperformance in the U.S., the benchmark DJIM Developed Markets Index stood out for relative performance against the conventional benchmark in 2023. The DJIM World Emerging Markets Index was a laggard, trailing behind the conventional benchmark as well as the developed market counterpart (see Exhibit 1).

Drivers of Shariah Index Performance in 2023

The outperformance of Shariah benchmarks against their conventional counterparts often comes into focus through the lens of sectors. Across global stock markets overall, a higher exposure to Information Technology stocks within Islamic indices, no exposure to conventional Financials (including banks) and less exposure to highly indebted companies (such as utilities) were the major drivers of the performance variance last year.

The Information Technology sector’s 53% gain played a major part in 2023, contributing to more than half of the S&P Global BMI Shariah’s total return. Energy, Utilities and Consumer Staples were the only sectors with losses for the year, while their impact was limited given their small representation in the index (see Exhibit 2). 

Global Sukuk Turned Around in Q4 2023

The global sukuk market also had a solid quarter with a gain of 4.5%, as measured by the Dow Jones Sukuk Index (ex-Reinvestment). The benchmark ended the year with a 5.5% return, falling slightly short of the 5.7% annual return of the iBoxx USD Overall, a global USD-denominated investment grade bond benchmark. The regional MENA and GCC Bond & Sukuk benchmarks gained 5.2%.

This article was first published in IFN Volume 21 Issue 3 dated Jan. 17, 2024.

How are advisors putting SPIVA data and factors to work as they build long-term plans to help clients achieve objectives? Delta Wealth Advisors’ Dino Efthimiou and Niko Finnigan join S&P DJI’s Brent Kopp for a practical look at the importance of tax management and the role of indexing in building a comprehensive plan for clients.