Funding Thesis
I final reviewed the ProShares S&P 500 Dividend Aristocrats ETF (BATS:NOBL) on February 5, 2024, noting how the portfolio’s elimination of Walgreens Boots Alliance, Inc. (WBA) was optimistic, NOBL remained inferior to the Vanguard Dividend Appreciation Index Fund ETF Shares (VIG) from a progress, high quality, and whole returns perspective. Since that overview was printed, NOBL has lagged VIG by 2.25% (12.09% vs. 9.84%), whereas the Schwab U.S. Dividend Fairness ETF (SCHD) and the SPDR S&P 500 ETF Belief (SPY) gained 10.60% and 14.16%, respectively.
On this replace, I’ll examine NOBL basically with VIG, SCHD, and SPY and summarize why I do not imagine it is the very best answer on your dividend progress portfolio. I hope you benefit from the overview.
NOBL Overview
Technique Dialogue and Efficiency Evaluation
NOBL tracks the S&P 500 Dividend Aristocrats Index, deciding on S&P 500 Index shares with no less than 25 years of consecutive dividend will increase. Because of this excessive barrier to entry, portfolio turnover is comparatively low (22% for the latest fiscal 12 months), and publicity to Know-how shares is proscribed. Whereas mega-cap tech shares like Apple Inc. (AAPL) and Microsoft Company (MSFT) get pleasure from Dividend Achievers standing with 10+ years of consecutive will increase, will probably be some time earlier than they get added to NOBL. This method has proved particularly detrimental to shareholders lately, however on the similar time, NOBL might be a approach to cut back threat. That is a giant a part of the pitch, too. Its truth sheet notes the next:
1. NOBL’s holdings are the S&P 500 Dividend Aristocrats: high-quality firms that haven’t simply paid dividends however grown them for no less than 25 consecutive years, with most doing so for 40 years or extra.
2. Usually family names, NOBL’s holdings typically have had steady earnings, strong fundamentals, and robust histories of revenue and progress.
3. NOBL’s technique has a demonstrated historical past of weathering market turbulence over time by capturing many of the positive factors of rising markets and fewer losses in falling markets.
The final assertion is value difficult, because it actually speaks to why traders would select NOBL over SPY within the first place. As proven under, NOBL has completed higher in down markets, averaging a 0.31% month-to-month beat since November 2013. Nonetheless, it is also lagged by 0.41% monthly in up markets, so the assertion just isn’t solely correct.
Moreover, the assertion doesn’t tackle frequency. Markets typically rise, simply not yearly. Subsequently, to outperform, NOBL must generate extra alpha in down markets than it does in up markets. Since this was not the case and up markets outnumbered down markets by greater than 2:1 (91 vs. 39), the tip end result was NOBL lagging SPY by 2.52% per 12 months.
To some traders, that is acceptable as a result of NOBL has demonstrated it could actually outperform considerably in down market years like in 2022. Nonetheless, I need to remind readers that NOBL is one in all many funds able to doing so. Over the identical interval, VIG and SCHD have delivered superior whole and risk-adjusted returns, together with some first rate draw back safety in years like 2015, 2018, and 2022.
NOBL Dividend Overview
NOBL pays dividends quarterly and yields 2.04% on a trailing foundation. The 15.98% ten-year dividend progress fee famous under is not correct, as NOBL has not but been round for the required 11 years to calculate this statistic. Its dividend progress observe file is fairly strong, aided by 16.09% progress over the past twelve months.
Nonetheless, VIG and SCHD have higher dividend progress observe data. These funds have double-digit five-year dividend progress charges in comparison with 8.68% for NOBL. In VIG’s case, it appears to be like sustainable as a result of it is supported by enough historic and forecasted earnings progress.
Lastly, I ask readers to think about the variety of consecutive dividend will increase required to deem an organization “secure.” NOBL requires 25 years, and its constituents have elevated by 35 straight years on common. Nonetheless, VIG and SCHD’s numbers are fairly strong at 21 and 19 years, which, for my part, is sufficient. The method made extra sense ten years in the past, however at present, NOBL excludes too many high-quality firms with out even providing a greater dividend yield or dividend progress fee than lower-cost friends.
NOBL Evaluation
Sector Allocations and High Ten Holdings
The next desk highlights the sector allocation variations between NOBL, VIG, SCHD, and SPY. Along with its minimal Know-how sector publicity, NOBL is mild on Communication Providers, Client Discretionary, Power, Actual Property, and Utilities. As a substitute, practically half of the portfolio includes shares in Client Staples (24.53%) and Industrials (22.63%).
In comparison with SCHD and SPY, it is much less diversified, which I imagine diminishes its means to handle threat in numerous market environments. Nonetheless, VIG’s diversification is probably worse, and it is smart to think about a number of ETFs in these circumstances. In NOBL’s case, it has 27.79%, 11.88%, and 13.14% overlap with VIG, SCHD, and SPY, so in case you are a NOBL shareholder and do not need to half with it, complementing it with both of those ETFs is smart.
NOBL’s prime ten holdings are under, totaling 16.49% of the portfolio. The highest inventory is Kenvue Inc. (KVUE), the patron well being inventory that spun off from Johnson & Johnson (JNJ) final 12 months. As a spin-off, the principles allowed Kenvue to retain JNJ’s dividend progress historical past, permitting each shares to enter the Index.
Stanley Black & Decker, Inc. (SWK) and Cincinnati Monetary Company (CINF) are on 55- and 63-year dividend progress streaks, becoming a member of 19 others with 50+ years of accelerating common annual dividend funds. Nonetheless, drawbacks to this technique embody decrease progress and the potential for firm administration to chop a dividend, even when it is in the very best curiosity of the shareholders.
NOBL Fundamentals By Sub-Trade
The next desk highlights chosen basic metrics for NOBL’s prime 25 sub-industries, totaling 75.05% of the portfolio. I’ve additionally included abstract metrics for VIG, SCHD, and SPY on the backside.
Listed here are 4 observations:
1. NOBL trades at 20.68x ahead earnings, which is nearly similar to VIG’s valuation however comes with considerably much less estimated earnings progress (4.83% vs. 7.45%). Subsequently, from a growth-at-a-reasonable-price perspective, NOBL is not engaging. There may be additionally an analogous hole in estimated one-year gross sales progress (2.65% vs. 5.44%).
2. NOBL’s constituents have a weighted common of two.35% dividend yield, and after deducting the fund’s 0.35% expense ratio, shareholders ought to internet 2.00% at present costs. VIG and SCHD have 0.06% expense ratios, which means their anticipated dividend yields are 1.73% and three.74%, respectively. All are enhancements over SPY, although lower-cost S&P 500 Index funds like SPLG, VOO, and IVV will yield roughly 1.30%.
3. NOBL’s picks have grown dividends by an annualized 6.45% over the past three years, which is about 1-3% lower than VIG, SCHD, and SPY. This dividend progress was supported by the portfolio’s 7.55% three-year earnings per share progress fee, however I warning one-year estimated earnings progress is decrease at 4.83%. If this holds, the end result will both be smaller dividend will increase or larger dividend payout ratios. Proper now, there’s enough space to maintain the dividend progress fee at 6-7% whereas nonetheless protecting the payout ratio under its four-year common (45.84% vs. 50.75%). Nonetheless, the payout ratio can shortly spiral uncontrolled, as with SCHD. Its payout ratio additionally was once under 50% however is now as much as 63% as a result of unfavourable earnings progress.
NOBL has a 7.59/10 Dividend Security Rating, which I derived utilizing particular person Searching for Alpha Issue Grades. This rating is healthier than SCHD however worse than VIG and SPY, and I depend on it when analyzing dividend ETFs as a result of it is complete. For instance, Clorox’s “C+” Dividend Security Grade notes its comparatively excessive 77.99% dividend payout ratio and disappointing 0.81% free money movement to dividend yield ratio.
4. NOBL’s 9.94% free money movement margin determine is low in comparison with its friends. To make sure, most of this pertains to its distinctive composition. For instance, the common tech inventory within the S&P 500 Index has 17.72% free money movement margins in comparison with 8.33% for these within the Client Staples sector. Nonetheless, the composition would not absolutely account for the distinction. One piece of proof is NOBL’s 8.57/10 sector-adjusted revenue rating. The rating ranks simply #81/102 within the large-cap mix class, which challenges the concept that such an intensive dividend progress observe file equates to sturdy high quality. For my part, 25 years is simply an arbitrary quantity. You do not want it, and one thing like 10+ years is a extra affordable minimal.
Funding Suggestion
Higher alternate options to NOBL exist. VIG, SCHD, and SPY supply completely different ranges of revenue that may attraction to all kinds of traders, however neither compromises high quality. NOBL’s poor sector-adjusted revenue rating suggests a number of holdings are elevating dividends once they most likely should not, more likely to preserve their status as financially sturdy firms. As well as, VIG affords extra earnings progress than NOBL and has the identical valuation, and NOBL’s historic outperformance vs. SPY in down markets has but to offset its underperformance in up markets, which happen extra often. Subsequently, I’ve determined to reiterate my “maintain” ranking and encourage present shareholders to discover alternate options. Thanks for studying.