4 Dividend Aristocrats ETFs for Your Income Portfolio

Dividend Aristocrats are an elite group of dividend-paying stocks that have increased their payouts at least once a year for 25 consecutive years or more. Out of all the companies on the S&P 500, the Dividend Aristocrats list contained just 51 companies at the end of 2015.

Some of the best dividend ETFs on the market are built on variants of this list. Here are funds that track various "Dividend Aristocrat" indexes. The specifics for each exchange-traded fund are listed below.

Source: ProShares, State Street Global Advisors.

The best Dividend Aristocrat ETF

Not all Dividend Aristocrats ETFs are created equal. The ETF that holds most true to the original ideal of the Dividend Aristocrats is the ProShares S&P 500 Dividend Aristocrats ETF.

Image source: Getty Images.

This exchange-traded fund is not actively managed, instead picking stocks from the S&P 500 Dividend Aristocrats Index. The index has a few rules for inclusion, chief among them being that stocks must be part of the S&P 500 Index, and must have have increased dividends for 25 consecutive years.

The index gives each component an equal weighting, thus giving smaller companies just as much relative importance as larger companies. If, and only if, the ETF cannot find at least 40 companies that have 25 years of uninterrupted dividend increases, then the index will include companies with "shorter dividend growth histories."

Notably, the requirement that a company have an uninterrupted history of paying larger dividends for 25 years means that it is heavily underweight technology stocks (it doesn't own any, per Morningstar data), and heavily invested in consumer defensive stocks (also known as consumer staples).

Source: Morningstar as of Aug. 17, 2016.

A worldwide Dividend Aristocrats ETF

One might think that selecting from dividend stocks around the world might allow a fund sponsor to avoid bending some rules, but the SPDR S&P Global Dividend ETF bends two important rules in the pursuit of the best dividend stocks.

The fund tracks the S&P Global Dividend Aristocrats Index, which includes companies that have followed a "managed-dividends policy of increasing or stable dividends for at least ten consecutive years." Importantly, this breaks two classic Dividend Aristocrat rules as companies can be included even if they do not increase their dividends, and the index requires only 10 years of dividend history.

The fund selects the top 100 stocks with the highest dividend yields, with no more than 20 stocks coming from each country. To protect the fund from chasing high yields that are not sustainable, it invests only in companies with a float-adjusted market cap of more than $1 billion, and which have a dividend payout ratio of less than 100%.

Source: Morningstar as of Aug. 17, 2016.

A mid-cap Dividend Aristocrats ETF

If you want to invest in dividend-paying companies that potentially have more growth opportunity, the S&P MidCap 400 Dividend Aristocrats ETF might be ideal for you. This fund selects stocks that are currently part of the S&P 400 Mid-Cap 400 Index, and have increased dividends in every year for at least 15 years, breaking the traditional requirement that Dividend Aristocrats increase their dividends for 25 consecutive years or more.

Whereas ProShares' traditional Dividend Aristocrats fund is heavily invested in consumer staples, a focus on mid-cap stocks and a weaker dividend history requirement has resulted in a mid-cap portfolio that is more heavily invested in utilities, financial services (asset managers and banks), and industrial companies. The fund currently includes 45 companies.

Source: Morningstar as of Aug. 17, 2016.

A higher-yielding Dividend Aristocrats ETF

If you're looking for the highest-yielding dividend stocks, the SPDR S&P Dividend ETF gets the job done. It tracks the S&P High Yield Dividend Aristocrats Index, which includes the highest-yielding S&P 1500 Composite components that have a record of consistently increasing dividends every year for at least 20 consecutive years, relaxing the traditional 25-year requirement for Dividend Aristocrats. 

The ETF weights stocks by their indicative yield, meaning that the ETF invests more money into the highest-yielding companies and less into the lowest-yielding companies. Thus, the fund has a high concentration in utilities, financial services, and industrial stocks, similar to the aforementioned midcap ETF. It also means that the fund is heavily underweight technology stocks, like most other funds on this list.

Alas, the SPDR S&P Dividend ETF does have a record worthy of envy. Its 10-year annualized returns beat and exceed the returns on the S&P 500 index by more than 1% annually, an incredible achievement. 

Source: Morningstar as of Aug. 17, 2016. 

The case for dividend stocks

History has shown that dividend-paying companies have outperformed companies that do not pay a dividend. Logically, it makes sense.

Companies that pay slowly increasing dividends over the span of three decades simply have to be companies with good earnings quality (net income corresponds with cash flow to pay a dividend) and have business models that are generally less cyclical than average (there's a reason car manufacturers, airlines, and banks don't make the strict list of Dividend Aristocrats).

These funds all offer you varying access to companies with impressive records of dividends at competitive prices. And while history is no guarantee, it stands to reason that over very long periods of time, dividend stocks will continue their outperformance relative to their non-dividend-paying peers.