In our last blog, we highlighted the superior long-term performance of the S&P High Yield Dividend Aristocrats® versus the S&P Composite 1500®, as well as compared to long-term Treasury bonds and the CPI. In this blog, we will shift our focus to examine the current discounted valuations and enhanced dividend yields of the S&P High Yield Dividend Aristocrats Index versus the S&P Composite 1500. Moreover, this blog will examine the S&P High Yield Dividend Aristocrats Index’s historical track record of providing significant downside protection during periods of severe equity market drawdowns.
Valuation Comparison
Exhibits 1-5 show the current valuations versus the S&P Composite 1500 relative to history. As Exhibit 1 shows, on a price-to-book, price-to-sales, price-to-earnings and composite basis (simple average of the three metrics), the S&P High Yield Dividend Aristocrats Index is trading at a 22.4%, 38.3%, 20.7% and 27.1% discount, respectively, as of March 28, 2024. Although not as high as the approximately 40% composite discount set back in September 2020, it is still in the 81st percentile of cheapness relative to history.
As Exhibit 6 displays, the S&P High Yield Dividend Aristocrats Index has always had a superior dividend yield versus the S&P Composite 1500. Although this is expected given the methodology, it is important to note that the S&P High Yield Dividend Aristocrats Index’s 2.85% yield is more than double the benchmark’s 1.36% yield as of March 28, 2024.
Exhibit 7 shows the consistent downside protection that the S&P High Yield Dividend Aristocrats Index has provided during historic market drawdowns. It has outperformed in all drawdown periods shown, except for the COVID-19 drawdown when it underperformed by 1.9% over the course of one month. Notably, during other periods of elevated broad equity market valuations such as the unwinding of the tech bubble and the Fed pivot in 2022, the S&P High Yield Dividend Aristocrats Index outperformed by 76.4% and 14.7%, respectively. Across all periods, the S&P Composite 1500 returned an average of -20.2%, versus -6.9% for the S&P High Yield Dividend Aristocrats Index.
Conclusion
Given the prospect of lower interest rates amid the anticipated ending of the rate hike cycle, high yielding quality stocks may be positioned favorably as investors seek yield and defensive positioning. For investors who may be concerned about lofty broad equity market valuations and seek exposure to high yield quality stocks trading at a favorable discount relative to history, the S&P High Yield Dividend Aristocrats Index is an option to consider.
The posts on this blog are opinions, not advice. Please read our Disclaimers.