Dividends play an important role in generating the total return on equity. Since 1926, dividends have contributed approximately one-third of total return for the S&P 500, while capital appreciations have contributed two-thirds. Therefore, sustainable dividend income and capital appreciation potential are important factors for total return expectations.

The ability of management to maintain stable or increasing dividends indicates the quality of a firm’s earnings and its growth prospects. Large companies use stable and increasing dividends as a signal of confidence in their firm’s prospects, while market participants consider such track records as a sign of corporate maturity and balance sheet strength.

The S&P 500 Dividend Aristocrats Index is designed to measure the performance of S&P 500 members that have followed a policy of increasing dividends every year for at least 25 consecutive years. Research shows that the Dividend Aristocrats exhibit both capital growth and dividend income characteristics, as opposed to other strategies that are pure yield or pure capital-appreciation oriented.

The members of the Dividend Aristocrats Index in 2016 consist of 50 securities which are diversified across 10 sectors. Unlike many dividend-yield strategies, which tend to be concentrated in the financials and the utilities sectors to achieve high yield, the Dividend Aristocrats Index is well diversified with no sector accounting for more than 30% of it.

It appears the ability to increase dividends for 25 consecutive years does not come at the expense of lower yield. The Dividend Aristocrats Index has consistently delivered higher yields than its benchmark, the S&P 500, with yields in the range of 2.0%-4.4% over the past 10 years.

The Dividend Aristocrats Index has outperformed the parent S&P 500 71.05% of the time in down months and by 44.55% of the time in up months.

Analysis shows that the Dividend Aristocrats Index outperformed its benchmark by an average of 2.14% per year.

The majority of the outperformance stems from the security selection plus the allocation effect.

These results confirm that the fundamental characteristics of the underlying stocks have been the major driver behind the out-performance.