Dividend Aristocrats need just 1.5% price growth to beat 4.9% Treasury yield

Mark Hulbert calculates that a portfolio of S&P 500 Dividend Aristocrats needs only 1.5% annualized price growth to outperform the 10-year U.S. Treasury over the next decade. The 10-year bond currently yields 4.9%, while the average yield for Dividend Aristocrats is 2.4%.

Hulbert, a regular contributor to MarketWatch, argues that the bond’s yield is fixed, whereas the dividends from Aristocrats are expected to rise. Dividend Aristocrats are S&P 500 constituents that have raised their payouts for at least 25 consecutive years. If these companies continue to increase dividends at their average growth rate since 2000, the total return will exceed that of the 10-year Treasury.

The math relies on the compounding effect of rising dividend checks. Hulbert notes that the annualized 10-year price-only growth rate for Aristocrats has rarely fallen below the 1.5% threshold required to beat the current bond yield. This dynamic makes the equity strategy a viable alternative despite the lower starting yield.

Warren Buffett has previously described this mechanism as the "secret sauce" behind Berkshire Hathaway’s success. In his 2022 annual report, Buffett detailed Berkshire’s seven-year purchase of 400 million shares of Coca-Cola, which cost $1.3 billion in total. The cash dividend from that position was $75 million in 1994. By 2022, that dividend had grown to $704 million.

Buffett noted that the dividend growth occurred every year. He stated that he and Charlie Munger only had to cash the quarterly checks. While the dividend growth was not spectacular on its own, it was accompanied by significant gains in the stock price. At year-end 2022, the Coca-Cola investment was valued at $25 billion.

Hulbert cautions that this approach is a long-term strategy. There is no guarantee that Aristocrats will beat the S&P 500 over shorter timeframes. Over the past decade, an ETF benchmarked to Dividend Aristocrats underperformed an ETF tied to the S&P 500. The long-term horizon is essential for the dividend growth to offset the initial yield disadvantage against bonds.

For investors seeking exposure without picking individual names, exchange-traded funds offer a low-cost entry point. The ProShares S&P 500 Dividend Aristocrats ETF tracks the full list of Aristocrats and charges a 0.35% expense ratio. The Vanguard Dividend Appreciation ETF uses different criteria, focusing on stocks with 10 years of consecutive dividend increases, and charges a 0.04% expense ratio.

Individual investors can also select specific stocks based on third-party recommendations. Hulbert identifies a group of Dividend Aristocrats that are recommended for purchase by at least two of the investment newsletters tracked by his firm, Hulbert Ratings. These firms pay a flat fee to be audited by Hulbert Ratings, which publishes performance data for the newsletters.