Want to generate passive income while you sleep? One excellent way to do so is by investing in companies that pay out dividends consistently. Dividend stocks are an excellent income source and can produce better returns than non-dividend payers.
However, with so many dividend stocks to choose from, picking individual companies can be a daunting task. If you're unsure which dividend stock to buy, the ProShares S&P 500 Dividend Aristocrats ETF (NYSEMKT: NOBL) could be a solid choice to invest in instead. (The term Dividend Aristocrats® is a registered trademark of Standard & Poor's Financial Services LLC.)
Dividend raisers have outperformed the S&P 500 over the past 50 years
According to a study by Hartford Funds, 69% of the S&P 500 index's total returns since 1960 are attributable to the contributions of reinvested dividends to its compound growth.
Another study by Hartford Funds and Ned Davis Research found that since 1973, companies that grew or initiated dividend payments have delivered annualized returns of 10.3% with a beta coefficient of 0.88 (meaning their returns are less volatile than those of the broader market). In the same period, an equal-weight S&P 500 fund returned 7.7% annually, while dividend non-payers delivered a 3.95% annualized return with a beta coefficient of 1.18.
Annualized returns and volatility by dividend policy, S&P 500 stocks 1973-2022
| Stock Category | Average Annualized Returns | Beta |
|---|---|---|
Dividend growers and initiators | 10.24% | 0.88 |
Dividend payers | 9.18% | 0.94 |
No change in dividend policy | 6.60% | 1.01 |
Dividend cutters and eliminators | (0.60%) | 1.22 |
Dividend non-payers | 3.95% | 1.18 |
Equal-weighted S&P 500 index | 7.68% | 1.00 |
Data Source: Hartford Funds.
Companies that consistently increase their dividend payouts tend to have strong businesses, good capital management, and a commitment to rewarding shareholders.
The ProShares S&P 500 Dividend Aristocrats ETF (exchange-traded fund) only invests in companies that have increased their dividend payouts every year for at least 25 consecutive years. The ETF aims to track the performance of the S&P 500 Dividend Aristocrats® Index, and currently yields a solid 2.3%.
ETFs can help you diversify your portfolio
ETFs are appealing because they allow investors to easily diversify across assets, industries, or stocks without needing a significant amount of capital up front. This diversification can help reduce portfolio risk and improve returns by smoothing out the ups and downs of the market.
The ProShares S&P 500 Dividend Aristocrats ETF has investments across 67 stocks spanning 10 industries. Investors can take comfort in knowing that no single industry makes up even as much as one-quarter of the value of the fund's portfolio. The consumer staples and industrial segments have the largest concentrations, each accounting for around 23% of the portfolio's value.
Chart by author.
The portfolio includes many familiar names. Target, which yields 3.3% and has raised its dividend for 52 consecutive years, is the largest holding, accounting for 1.71% of the portfolio. Other top holdings include credit rating agency S&P Global, which has raised its payouts for 50 consecutive years, Clorox (46 years of dividend hikes), Ecolab (31 years), and Sherwin-Williams (46 years).
When considering an ETF, look closely at the expense ratio
One critical factor to consider when investing in ETFs is the expense ratio -- the percentage of your investment that you'll pay annually to cover the fund's operating expenses, including administrative costs, management fees, and marketing expenses. For example, if you invested in an ETF with a 0.5% expense ratio, you'd pay $1 for every $200 invested.
The average expense ratio for ETFs is around 0.45%, according to Morningstar. The ProShares S&P 500 Dividend Aristocrats ETF comes in below this, with an expense ratio of 0.35%.
Finally, you'll want to consider your objectives. If you want to diversify your portfolio and collect additional income, the ProShares S&P 500 Dividend Aristocrats ETF is a solid choice. However, if you're merely looking for diversification, don't care as much about dividend payments, and don't mind a little more volatility, the Vanguard S&P 500 Index Fund may be a better option, as it has an expense ratio of just 0.03%.
A solid choice for risk-averse investors looking to generate extra income
The ProShares S&P 500 Dividend Aristocrats ETF can be great if you're an investor starting with a small amount of capital and looking to generate some additional income from your portfolio. Its dividend yield of 2.3% is above that of the S&P 500 (which currently yields around 1.4%), making it a solid option for risk-averse investors looking for stable dividends while reducing volatility and drawdowns relative to the broader market.
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Courtney Carlsen has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends ProShares Trust-ProShares S&P 500 Dividend Aristocrats ETF, S&P Global, Target, and Vanguard S&P 500 ETF. The Motley Fool recommends Ecolab and Sherwin-Williams. The Motley Fool has a disclosure policy.
