Is trouble looming for the dividend aristocrats of the US stock market?
Buying shares in companies that have proved themselves reliable dividend payers has been a winning strategy in the era of low interest rates and aggressive central bank policy.
The S&P Dividend Aristocrats index — made up of 53 companies that have increased their annual dividend each year for the past quarter of a century — has generated a total return of about 440 per cent since the bull market for stocks began in March 2009. In contrast, the S&P 500 is up 372 per cent in the same period, including the reinvestment of dividends.
However, this year the aristocrats index has fallen 2.2 per cent versus a 0.1 per cent decline for the broader S&P 500, including the reinvestment of dividends.
Part of the explanation is that holding cash has become a more viable investment decision. As the Federal Reserve tightens policy, the rise in yields for short-dated government bills — seen as cash-like instruments because they can be sold very quickly — has for the first time in a decade become an attractive element for portfolios.
At an implied yield of 2.08 per cent, the 12 month T-bill sits above the S&P 500’s 12-month trailing dividend of 1.95 per cent. Bills also look competitive against the low yields of longer-dated Treasury notes.
If T-bills stay competitive, it does not bode well for the dividend aristocrats.
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