Eoin Treacy's view Over the last three years we have
spent a good deal of time extolling the benefits of companies with long records
of increasing dividends. Among the reasons for this preference is because such
companies generally tend to have reasonably solid balance sheets and are generally
managed in a responsible manner reflecting high standards of corporate governance.
A considerable number fund their dividend programs because they have global franchises, dominate their respective niches and are experts in fostering brand loyalty. It is for this reason that there is such crossover between S&P's various dividend aristocrat indices and Fullermoney's Autonomies designation.
Even on the most benign assumption that the end of quantitative easing will coincide with a return to self-sustaining growth for the US economy, the logical assumption is that short-term interest rates will return to more normal levels, where savers are not penalised for refusing to speculate. Investors are then presented with the challenge of ensuring that the return on their investments keeps pace with a more competitive yield environment. The attractions of companies with solid records of dividend growth in excess of inflation rates or the yield on Treasuries is self evident.
The S&P500 Dividend Aristocrats Total Return Index / S&P 500 Total Return Index offers a graphic representation of the outperformance of reliable dividend paying shares. The S&P500 Dividend Aristocrats outperformed impressively from 2000, performed more or less in line with the wider market between 2002 and 2008 and the ratio has trended persistently higher over the last 5 years. Provided the progression of higher reaction lows remains intact, the trend can continue to be considered consistent.
The constituents of the S&P 500 Dividend Aristocrats Index have among other criteria been increasing their dividends for at least 25 consecutive years. The Index had become quite overextended relative to the 200-day MA when it hit a peak near 725 a month ago and remains in a process of mean reversion. A sustained move below the trend mean, currently near 650 would be required to begin to question medium-term uptrend consistency.
The constituents of the S&P Europe 350 Dividend Aristocrat Index have been raising their dividends for at least 10 consecutive years. The Index has returned to test the medium-term progression of higher reaction lows and the region of the 200-day MA. It will need to find support within the next 10 points if the medium-term uptrend is to continue to be given the benefit of the doubt.
Bloomberg no longer updates the S&P Pan Asia Dividend Aristocrats Index in nominal terms, but it still supports the total return index. The constituents of the Index have been raising their dividends for at least 7 consecutive years. It has dipped below the 200-day MA on a number of occasions since 2008 but has now dropped to test the 4000 region where it will need to find support if the benefit of the doubt is to continue to be given to the medium-term upside.
The constituents of the S&P/TSX Dividend Aristocrat Index have been raising their dividends for at least the last 5 consecutive years. The Index lost momentum from 2011 and failed to sustain a move to new highs in February. It has pulled back below the 200-day MA and is now testing the progression of higher reaction lows. A clear upward dynamic will be required to suggest demand is returning to dominance in this area.
We have been anticipating a process of mean reversion for the last few months. The pace of the correction has picked up this week. What is clear from the above charts is that the weakness of Asian currencies and the exposure of the Canadian index to the commodity sector has negatively affected their performance. When the dust settles following this correction, Dividend Aristocrats represent an interesting stable of shares from which upside leaders are likely to appear and are therefore worth monitoring for early signs of leadership. .
PDFs of the constituents of these indices can be found in the Subscriber's Forum.