December 2008
S&P 500 Dividend Aristocrats Analytical Contact Aye M. Soe (212) 438 - 1677
[email protected]
• Since 1926, dividends have contributed to approximately one-third of total return while capital appreciations have contributed twothirds. Therefore, both sustainable dividend income and capital appreciation potential are important to total return expectations. • Managers use stable and increasing dividends as a sign of confidence in their firm’s prospects, while investors consider such track records as a sign of corporate maturity and strength.
Media Contact Dave Guarino (212) 438-1471
[email protected]
• The S&P 500 Dividend Aristocrats Index measures the performance of the S&P 500 index constituents that have followed a policy of consistently increasing dividends every year for at least 25 consecutive years. • The S&P 500 Dividend Aristocrats Class of 2009 includes 52 securities diversified across 10 sectors. The constituents have both growth and value characteristics. • The composition of the S&P 500 Dividend Aristocrats contrasts with that of typical dividend oriented lists and benchmarks that have high exposure to Financials and Utilities sectors and have a steep value bias.
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Introduction Dividends have fascinated investors and theorists since the origin of modern financial theory. As such, voluminous research has been written on various topics related to dividends and dividend paying firms. Despite inconclusive evidence of whether or not dividend paying firms are better investments or whether or not dividends are more important risk factors than size, sector or other fundamental metrics, the undisputable fact remains – dividend yield is an important component of total return. In this paper, the S&P 500 Dividend Aristocrats Class of 2009, a list of S&P 500 constituents that have increased their dividend payouts for 25 consecutive years, is introduced and discussed.
Importance of Dividends Dividends are an Important and Growing Portion of Personal Income
The percentage of the dividend income as part of personal income has steadily increased over time making dividends an important source of income. In 2007, dividend income comprised 6.7% of per capita personal income in the United States, compared to 4.8% ten years prior and 2.8% twenty years prior. During the same period, the source of income from capital markets, interest, steadily shrunk from 15.03% in 1988 to 10.41% in 2007. The value of total dividend income in 2000 has increased significantly from US$ 129.7 billion in 1988 to US$ 785.8 billion in 2008, representing over 600% growth. Interest income, on the other hand, grew only 189% during the same period. Exhibits 1 and 2 chart the growing importance of dividend income versus interest income. As equity ownership becomes even more ubiquitous, and a growing number of retiring Americans seek income-generating assets, the importance of personal dividend income will increase.
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Exhibit 1: Dividend Income as Percentage of Personal Income 18% 16% 14% 12% 10% 8% 6% 4% 2%
19 88 19 89 19 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07
0%
Dividend Income as % of Personal Income
Interest Incom e as % of Personal Income
Source: Bureau of Economic Analysis
Exhibit 2: Dividend and Interest Income (in 2000 US Dollars) 1400
Billions of US Dollar
1200 1000 800 600 400 200
07
06
20
05
20
04
20
03
20
02
20
01
20
00
20
99
20
98
Personal Dividend Income (2000 Dollars)
19
97
19
96
19
95
19
94
19
93
19
92
19
91
19
90
19
89
19
19
19
88
0
Personal Interest Income (2000 Dollars)
Source: Bureau of Economic Analysis
Dividends Contribute to More than One-Third of Long-Term Total Return from Equity
Historically, dividends have contributed approximately one-third of total equity return. Exhibit 3 plots the contribution of dividends to the average monthly
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total return of the S&P 500 through several decades.1 From 1926 to November 2008, dividend income constituted 35% of the monthly total return of the S&P 500.
Exhibit 3: Dividend Income as a % of the Monthly Total Return of the S&P 500 60% 53% 50% 50% 39%
40%
35% 28%
30%
26%
20% 14% 10% 0% 1940's
1950's
1960's
1970's
1980's
1990's
1926 to Nov2008
Source: Standard & Poor’s.
Compounding Effect of Dividend Income Another important aspect of dividends can be observed through the effect of compounding, as illustrated in Exhibit 4 and 5. Excluding dividends, a US$ 1 investment made in the S&P 500 on January 1, 1930 would have grown to US$ 42 by the end of 2007. During the same investment horizon, a US$ 1 investment with dividends reinvested would have yielded US$ 1052. Exhibit 5 plots this compounding effect for the S&P 500 over several time horizons. The plotted figures are averages for every continuous investment horizon, over each time period based on monthly data for the last 50 years, ending in 2007.
1
The S&P 500 did not actually have 500 stocks prior to 1957, and was known as the S&P Composite Index. However, for simplicity’s sake we use the term “S&P 500” throughout this paper.
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Exhibit 4: S&P 500 Cumulative Return of US$ 1 from 1930 - 2007 $10,000.00
$1052 $1,000.00
$100.00
$42 $10.00
$1.00
S&P 500 Price Return
2007
2004
2001
1998
1995
1992
1989
1986
1983
1980
1977
1974
1971
1968
1965
1962
1959
1956
1953
1950
1947
1944
1941
1938
1935
1932
1929
$0.10
S&P 500 Dividend Reinvested Total Return
Source: Standard & Poor’s. Returns are in USD.
Exhibit 5: Compounding Effect 250% 226%
200%
150% 129%
100% 75% 39%
50%
48%
26% 8%
12%
0% 1 Year
3 Year S&P 500 Price Return
5 Year
10 Year
S&P 500 Total Return
Source: Standard & Poor’s.
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S&P 500 Dividend Aristocrats
The S&P 500 Dividend Aristocrats Dividend growth has been intricately linked to equity valuation since John Burr Williams’ Dividend Discount Model in the late 1930’s. As noted, managers use stable and increasing dividends as a signal of their confidence in a firm’s prospects. Standard & Poor’s has been identifying stocks with a long history of consistent dividend increases (which it terms Dividend Aristocrats) since the early 1970’s. The S&P 500 Dividend Aristocrats Index is an index of stocks that follow a managed dividend policy. To be eligible securities must meet the following criteria: 1. Be a member of the S&P 500 Index 2. Have increased dividends for at least 25 consecutive years Constituents are equal weighted and re-weighted on a quarterly basis.
Sector Diversification The S&P 500 Dividend Aristocrats Class of 2009 consists of 52 securities diversified across 10 sectors. Unlike many dividend yields based portfolios, which concentrate heavily on the Financials and the Utilities sectors to achieve the high yield, the S&P 500 Dividend Aristocrats are well diversified with no sector weighing more than 20%. Exhibit 6 illustrates the sector diversification of the S&P 500 Aristocrats as of the latest December rebalancing. Exhibit 6: Sector Diversification Telecommunication Information Technology
Energy 1.92%
Utilities 5.77%
1.92%
Services 1.92%
Industrials 13.46%
Health Care 11.54%
Consumer Discretionary 21.15%
Consumer Staples 17.31%
Financials 15.38% Materials 9.62%
Source: Standard & Poor’s. Data as of December 2008 rebalancing.
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Since companies across sectors may follow a managed dividend policy and may exhibit consistent dividend growth, the S&P Dividend Aristocrats have drawn their constituents from a broad range of sectors through the index’s history. Exhibit 7 charts the sector composition of the S&P 500 Dividend Aristocrats from year-end 1998 to year-end 2007. Exhibit 7: Sector Composition of Aristocrats over Time 100%
90%
19% 23%
80%
21%
16%
16%
20%
19%
23%
Information Technology
27% 22%
70% 17%
12% 15%
12%
13%
Utilities
12% 12% 10%
60% 21%
23%
50% 19%
25%
21%
21%
21%
10%
Telecommunication Services Financials
22%
Health Care
20% 19%
40%
Consumer Staples Consumer Discretionary
15% 15%
30%
Energy
12%
16%
19%
20%
20%
21%
19% 19%
Industrials
19%
Materials
20% 17% 17%
15%
15%
13%
12%
10%
10%
5%
5%
7%
7%
7%
7% 8%
10% 8%
6%
8%
12%
17%
0% 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Source: Standard and Poor’s. Percentages are as of year-end. Index composition prior to May 2005 is simulated.
Quality Rankings Management’s ability to maintain stable or increasing dividends indicate the quality of the firm’s earnings and its growth prospects. For over 40 years, the S&P Common Stock Ranking Systems ranks stocks in categories based on the growth and stability of earnings and dividends. Exhibit 8 plots the distribution
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of quality ranks of the S&P 500 Dividend Aristocrats Index constituents against those of the S&P 500 Index.
Exhibit 8: Quality Rankings of the S&P 500 Dividend Aristocrats 35%
33% 29%
30% 26.28%
25%
23% 21% 19.09%
20% 13.46%
15% 11.66%
12%
10%
8.30%
5%
2%
0% A+ (Highest)
A (High)
A- (above Average)
B+ (Average)
S&P 500 Dividend Aristocrats
B or Less (Below Average or Lower)
Not Ranked
S&P 500
Source: Standard & Poor’s. Data as of 11/30/2008.
Aristocrats Have Growth and Income Characteristics Traditionally, income seeking portfolios tend to have value characteristics as investors lean towards securities with high dividend yield and lower price multiples. In contrast, the S&P 500 Dividend Aristocrats portfolio exhibits both growth and value characteristics. The Aristocrats are selected not only based on their consistent dividend payout level, but also on long-term dividend and earnings growth rates, as well as on profitability measures. Exhibit 9 illustrates the style breakdown of the portfolio composition in each of the last ten years.
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Exhibit 9: The Growth and Value Characteristics of the S&P 500 Dividend Aristocrats 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1998
1999
2000
2001
2002
2003
Weight of Growth Stocks
2004
2005
2006
2007
Class of 2009
Weight of Value Stocks
Source: Standard & Poor’s. Based on the Style Weights for the S&P Americas BMI as of year-end 1998 -2007 and as of November 30, 2008. The growth and value scored prior to May 2005 are backtested.
Current and Historical Yield As shown in Exhibit 10, the S&P 500 Dividend Aristocrats Index has consistently delivered yields in the range of 1.98% to 4% over the last ten years.
Exhibit 10: Historical Yield 4.5% 4.0%
Yield
3.5% 3.0% 2.5% 2.0% 1.5% Nov98
Nov99
Nov00
Nov01
Nov02
Nov03
Nov04
Nov05
Nov06
Nov07
Nov08
Source: Standard & Poor’s. Yields before May 2005 are backtested.
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S&P 500 Dividend Aristocrats
Exhibit 11: Current Yield 5%
3.99%
4% 3.19% 2.93%
3%
2%
1% 0.43%
0% U.S 6 Month Treasury Bill
U.S 10 Year Treas ury Bond
S&P 500 Dividend Aris tocrats
S&P 500
Source: Standard & Poor’s. Data as of 11/30/2008.
Risk/Return Profile of the S&P 500 Dividend Aristocrats Historically, the S&P 500 Dividend Aristocrats have outperformed the S&P 500 and the S&P 500 Equal Weight indices with lower volatility. Exhibit 12 compares the performance characteristics of the S&P 500 Dividend Aristocrats against those of the S&P 500 and the S&P 500 Equal Weight indices. Exhibit 13 plots the historical annual performance of the S&P 500 Dividend Aristocrats against the S&P 500. Exhibit 12: Risk/Return Characteristics Returns 3 Year 5 Year 10 Year 15 Year Standard Deviation 3 Year 5 Year 10 Year 15 Year Sharpe Ratio 3 Year 5 Year 10 Year 15 Year
S&P 500
S&P 500 Equal Weight
S&P 500 Dividend Aristocrats
-8.67% -1.39% -0.93% 6.47%
-11.44% -1.74% 2.37% 7.33%
-3.32% 2.39% 3.73% 9.2%
15.26% 13.07% 15.21% 14.99%
17.97% 15.66% 17.11% 16.16%
12.44% 10.69% 12.9% 12.94%
-0.81 -0.34 -0.28 0.17
-0.84 -0.31 -0.05 0.21
-0.56 -0.06 0.04 0.41
Source: Standard & Poor’s. Data as of 11/30/2008. Returns are in USD. Index returns prior to May 2005 are backtested.
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Exhibit 13: Historical Annual Performance 40% 30%
29%
29%
25% 17%
21%
20%
15% 10%
11%
16%
11%
10%
17% 5%
5% 4%
0% -2% -5%
-10%
-9%
-12%
-10%
-20%
-22%
-22% -30% -38% -40% -50% 1998
1999
2000
2001
2002 S&P 500
2003
2004
2005
2006
2007
YTD
S&P 500 Dividend Aristocrats
Source: Standard & Poor’s. Data from 1998 to 11/30/2008. Index returns prior to May 2005 are backtested.
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S&P 500 Dividend Aristocrats Class of 2009 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52
Standard & Poor’s
T icker MMM AB T AF L AP D AD M AD P AV Y B CR BBT B DX B MS C TL CB C INF C LX KO ED D OV EMR X OM F DO G CI GE G WW TEG JNJ JCI K MB LM LEG LLY LOW MTB MC D MH P P EP P FE P BI P PG PG S TR R OH S HW S IAL S WK S TT S VU TG T U SB V FC W AG W MT
N ame 3M Company Abbott Labs AF LAC Inc. Ai r P roducts & C hemicals Archer-Daniels-Midland Automati c D ata Processing Inc. Avery Dennis on Corp. B ard (C .R .) Inc. B B &T C orporation B ecton, Dickinson B emis Co. C ent ury Telephone C hubb C orp. C incinnati Financial C lorox Co. C oca C ola Co. C onsolidated Edison D over C orp. Emerson Electric Exxon Mobil Corp. F amily Dollar S tores G annett Co. G eneral Electric G rai nger (W .W.) Inc. Integrys Energy Group, Inc. Johnson & Johnson Johnson C ontrol s K imberly-Clark Legg Mason Leggett & Plat t Lill y (Eli) & Co. Lowe's Cos. M& T B ank Corp. Mc Donald's Corp. Mc Graw-Hill P epsiCo Inc. P fi zer, Inc. P itney-Bowes P PG Industries P rocter & Gamble Q uest ar C orp. R ohm & Haas S herwin-W illiam s S igma-Aldrich S tanley Works S tate Street Corp. S upervalu Inc. T arget Corp. U .S . B ancorp V .F . C orp. W algreen Co. W al-Mart Stores
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Sector Indust rial s Health C are Financials Materials Consum er S taples Information Technology Indust rial s Health C are Financials Health C are Materials Telecommunication Services Financials Financials Consum er S taples Consum er S taples Utilities Indust rial s Indust rial s Energy Consum er Di scretionary Consum er Di scretionary Indust rial s Indust rial s Utilities Health C are Consum er Di scretionary Consum er S taples Financials Consum er Di scretionary Health C are Consum er Di scretionary Financials Consum er Di scretionary Consum er Di scretionary Consum er S taples Health C are Indust rial s Materials Consum er S taples Utilities Materials Consum er Di scretionary Materials Consum er Di scretionary Financials Consum er S taples Consum er Di scretionary Financials Consum er Di scretionary Consum er S taples Consum er S taples
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S&P 500 Dividend Aristocrats
Disclaimers This report is published by Standard & Poor’s, 55 Water Street, New York, NY 10041. Copyright © 2008. Standard & Poor’s (S&P) is a division of The McGraw-Hill Companies, Inc. All rights reserved. Standard & Poor’s does not undertake to advise of changes in the information in this document. “Standard & Poor’s” and “S&P” are trademarks of The McGraw-Hill Companies, Inc. Other index names are trademarks of respective index providers. These materials have been prepared solely for informational purposes based upon information generally available to the public from sources believed to be reliable. Standard & Poor’s makes no representation with respect to the accuracy or completeness of these materials, whose content may change without notice. Standard & Poor’s disclaims any and all liability relating to these materials, and makes no express or implied representations or warranties concerning the statements made in, or omissions from, these materials. No portion of this publication may be reproduced in any format or by any means including electronically or mechanically, by photocopying, recording or by any information storage or retrieval system, or by any other form or manner whatsoever, without the prior written consent of Standard & Poor’s. Standard & Poor’s does not guarantee the accuracy and/or completeness of the S&P indices, any data included therein, or any data from which it is based, and Standard & Poor’s shall have no liability for any errors, omissions, or interruptions therein. Standard & Poor’s makes no warranty, express or implied, as to results to be obtained from the use of the S&P indices. Standard & Poor’s makes no express or implied warranties, and expressly disclaims all warranties of merchantability or fitness for a particular purpose or use with respect to the S&P indices or any data included therein. Without limiting any of the foregoing, in no event shall Standard & Poor’s have any liability for any special, punitive, indirect, or consequential damages (including lost profits), even if notified of the possibility of such damages. Standard & Poor’s does not sponsor, endorse, sell, or promote any investment fund or other vehicle that is offered by third parties and that seeks to provide an investment return based on the returns of the S&P indices. A decision to invest in any such investment fund or other vehicle should not be made in reliance on any of the statements set forth in this document. Prospective investors are advised to make an investment in any such fund or vehicle only after carefully considering the risks associated with investing in such funds, as detailed in an offering memorandum or similar document that is prepared by or on behalf of the issuer of the investment fund or vehicle. Analytic services and products provided by Standard & Poor’s are the result of separate activities designed to preserve the independence and objectivity of each analytic process. Standard & Poor’s has established policies and procedures to maintain the confidentiality of non-public information received during each analytic process.
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