The Nasdaq Dividend Achievers Index is a group of companies that have consistently rewarded shareholders with increasing dividend payouts.
Companies qualify for the Dividend Achievers List if they have raised their dividends each year for at least 10 consecutive years and meet certain trading liquidity requirements.
Why is the Dividend Achievers List popular? Generally speaking, companies that consistently raise their dividends are financially healthy, growing businesses.
Over time, these types of companies have done well in the market while providing shareholders with safe, growing income.
Dividend Achievers Performance
Invesco offers an exchange traded fund (ETF) that tracks the Nasdaq Dividend Achievers Index. The fund is called the PowerShares Dividend Achievers ETF and trades under the ticker symbol PFM. We analyzed this ETF to evaluate the performance of the Dividend Achievers Index.
As seen below, the Dividend Achievers group has collectively outperformed the Russell 3000 Value Index over each of the time periods listed below.
Source: PowerShares Dividend Achievers (as of 3/31/16)
Dividend Achievers have also recorded less volatility than the broader market, helping preserve investors’ capital. High quality businesses often generate more predictable earnings, which makes their stocks fluctuate less.
During 2008, we can see that the Dividend Achievers Index fell by 29%, which isn’t pretty but it was meaningfully better than the S&P 500’s drop of 37%.
Dividend Achievers’ annual returns in the chart below have also remained in a tighter range than the S&P 500 over the last 10 years, highlighting the lower volatility of the Dividend Achievers Index.
Source: PowerShares Dividend Achievers, Simply Safe Dividends
Dividend Achievers Sector Mix
Looking at the sector mix of Dividend Achievers can help us identify areas of the market that are potentially more reliable for safe, growing income.
The table below shows the sector weights for the Dividend Achievers Index as of the end of March 2016. However, the index is not equally weighted – it is based on the market cap of each stock, so larger companies are given bigger weights.
Source: Nasdaq Dividend Achievers
To get a better feel for where these consistent dividend growers are coming from, we equally-weighted the Dividend Achievers list to reveal the following sector mix:
We can see that the far majority of Dividend Achievers come from the consumer, industrials, financials, and utilities sectors. Many areas within these sectors are characterized by a slow pace of change and more predictable demand trends, which helps create an environment favorable for consistent dividend growth.
Technology was among the least represented sectors compared to the broader market because of its faster pace of change and higher focus on reinvesting for growth rather than returning capital to shareholders.
These findings are largely consistent with our previous research on the best stock sectors for dividends.
Top 10 Dividend Achievers
Since the Dividend Achievers Index is weighted by market cap, the top 10 stocks by weight are also some of the biggest companies in the world.
Each of the top 10 Dividend Achievers has increased its dividend for at least a couple of decades, and most are dividend aristocrats or dividend kings.
Importantly, these companies are all blue-chip dividend stocks. It’s important to remember that consistent dividend growth is made possible by a strong business model and committed management team – not the other way around.
The top 10 Dividend Achievers are all time-tested businesses that dominate their markets, generate healthy cash flow, and have enduring competitive advantages. Remaining focused on these qualities can help us identify the safest, most reliable dividend growth stocks.
Source: Nasdaq Dividend Achievers
Not All Dividend Achievers are Safe
As of March 2016, there were more than 260 Dividend Achievers. While this isn’t a huge group, it’s large enough to contain a number of dogs.
Consider the fact that only about 150 companies have managed to increase their dividends for at least 20 consecutive years – a drop off of nearly 50% compared to the number of Dividend Achievers.
A 10-year period is simply not a very meaningful amount of time in the grand scheme of things. Companies can benefit from long-tailed macro themes over the course of a decade that later reverse or fizzle out. Separating luck from skill is difficult over relatively short periods of time.
An example would be the slump in commodities that has occurred in recent years. For more than a decade, commodity producers reigned supreme as China engaged in a debt-fueled spending binge that sent the prices of metals and energy soaring.
Mining, construction, manufacturing, steel, and numerous other industries boomed…until they didn’t. A number of these firms grew their dividends for more than 10 straight years only to cut them in recent years. BHP Billiton is one example.
The point is, a 10-year dividend growth streak far from ensures the safety of a company’s dividend.
We can see this if we turn back the clock to the financial crisis. The Dividend Achievers ETF (PFM) paid out total dividends per share of 35.9 cents in 2008, a healthy increase of about 9% compared to 2007.
However, dividends dropped to 29.7 cents per share in 2009 and bottomed out at 27.9 cents in 2010, representing a peak-to-trough decline of 22%.
Dividend payments surpassed their 2008 peak in 2012, but many investors did not anticipate a 20%+ drop in their annual income from this group of “reliable” dividend payers.
Other Areas to Find Consistent Dividend Growers
Many dividend investors like to look at stocks that have maintained even longer dividend growth streaks to weed out some of the “lucky” companies with less sustainable dividend growth.
The Dividend Aristocrats List is one of the most popular places to hunt and contains approximately 50 businesses. Each company has raised its dividend for at least 25 years and is a member of the S&P 500 Index.
For investors seeking even longer dividend growth streaks, the Dividend Kings List contains close to 20 companies that have managed to increase their dividends for at least 50 straight years.
Instead of solely focusing on dividend growth streaks as a measure of dividend safety, we prefer to analyze some of the most important financial ratios for dividend investing such as a company’s balance sheet, cash flow generation, and payout ratios.
Investors like to look at the Dividend Achievers List because it contains a number of businesses that have demonstrated a more meaningful commitment to their dividends compared to the average firm.
However, a 10-year dividend growth streak is certainly no guarantee that a company’s dividend payment is safe, much less sustainably growing. There were plenty of dividend cuts during the last recession to prove this point.
Investors managing a dividend portfolio can certainly use the Dividend Achievers Index as a resource for new idea generation. However, they should remain aware that the list contains a number of companies that have benefited from more luck than skill.
Remaining focused on business quality and being aware of key risk factors that impact dividend safety and growth are prudent things to do before making any investment decision.